Journal of Banking and Finance 149 (2023) 106779

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Journal of Banking and Finance

journal homepage: www.elsevier.com/locate/jbf

Income inequality and entrepreneurship: Lessons from the 2020

COVID-19 recession
Christoph Albert a,∗, Andrea Caggese b, Beatriz González c, Victor Martin-Sanchez d,1
a
Collegio Carlo Alberto
b
UPF, CREI and Barcelona GSE
c
Banco de España
d
University of Southern Denmark

a r t i c l e i n f o a b s t r a c t

Article history: We study entry into entrepreneurship during the COVID-19 recession of 2020 using new data from an
Received 27 April 2022 extensive survey of more than 24,0 0 0 Spanish households, conducted between June and November 2020.
Accepted 14 January 2023
We find that while the overall decline in the startup rate in 2020 was large, and of a similar magnitude
Available online 15 January 2023
as that during the Great Recession, the differential impact depending on ex ante income was starkly
JEL classification: different. During 2020, the drop in firm entry was entirely concentrated among low- and medium-income
E20 households. We show that the entrepreneurship gap between these households and their high-income
E32 counterparts is not directly explained by social distancing, since it is mostly driven by the sectors not
D22 directly affected by lockdown measures, and it is larger among households that did not suffer a negative
J23 income shock during the pandemic. Our results instead indicate that high-income households performed
M13 relatively better during the COVID-19 recession because they had the means to exploit new business
Keywords: opportunities, thanks to their larger wealth and better access to external finance.
Recessions © 2023 The Author(s). Published by Elsevier B.V.
Financial crisis
This is an open access article under the CC BY-NC-ND license
Entrepreneurship
(http://creativecommons.org/licenses/by-nc-nd/4.0/)
Firm dynamics
Coronavirus
COVID-19

1. Introduction fects the entrepreneurial activities of low-income households.2 Re-

Income inequality and entrepreneurial dynamics are strongly
related (Halvarsson et al., 2018, Packard and Bylund, 2018, Bru-
ton et al., 2021). On the one hand, the rise of superstar innova-
tive entrepreneurs is an important driving force behind rising in-
equality (Gabaix et al., 2016, Aghion et al., 2019). On the other
hand, Braggion et al. (2021) show that inequality negatively af-
latedly, Lee et al. (2022) show that rising income inequality re-
duces job creation in small firms.
How did the COVID-19 pandemic and the subsequent 2020
recession affect the relationship between inequality and en-
trepreneurship? The COVID-19 crisis caused large income losses
for the affected households, and the high level of uncertainty re-
duced access to bank loans for potential entrepreneurs.3 Despite
the prompt policy measures to support incumbent firms hit by the
shock, such as furlough schemes, guaranteed loans or moratoriums,
there has been more limited and less timely government support

∗
Corresponding author.
E-mail addresses: christoph.albert@carloalberto.org (C. Albert),
andrea.caggese@upf.edu (A. Caggese), beatrizgonzalez@bde.es (B. González),
2
vms@sam.sdu.dk (V. Martin-Sanchez). They construct a measure of wealth inequality at the US county level, based
1 on the distribution of financial rents, and find that in more unequal areas, en-
The views expressed in this paper are those of the authors and do not neces-
sarily represent the views of Banco de España or the Eurosystem. Andrea Caggese trepreneurs are less likely to apply for a loan, fearing that their applications will
acknowledges financing from the Plan Estatal de Investigación Científica y Téc- be turned down; instead, they use more of their own funds to finance their ven-
nica y de Innovación 2017–2020, project number PID2020-116268GB-I00, and from tures.
3
the Spanish Agencia Estatal de Investigación (AEI), through the Severo Ochoa Pro- The ECB’s Business Lending Survey (BLS) and Survey on the Access to Finance
gramme for Centres of Excellence in R&D (Barcelona School of Economics CEX2019- of Enterprises (SAFE) reveal a worsening of credit availability for SMEs during 2020;
00915-S). see Fig. C.3 in the Appendix.

https://doi.org/10.1016/j.jbankfin.2023.106779
0378-4266/© 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/)
C. Albert, A. Caggese, B. González et al.
for the creation of new business.4 Since startups play a key role in
terms of job creation, innovation and long-run growth, the lack of
firm creation can hinder the recovery and future growth, generat-
ing a missing generation of firms (Sedláček, 2020).
The COVID-19 shock nonetheless also presented an opportunity
to open new types of digitally oriented businesses, and the avail-
ability of public subsidies and a large pool of unemployed work-
ers were also factors that should have promoted firm creation (Li-
Ying and Nell, 2020). How did these positive and negative shocks
affect the formation of new businesses? And were these effects
heterogeneous along the income distribution?
Despite their importance, little is known about these issues,
since most of the recent research focuses on the effect of the
COVID-19 shock on incumbent businesses, and relatively few stud-
ies analyze how it has affected new business dynamics. Some de-
scriptive early studies analyzed the overall dynamics of new busi-
ness applications (see, e.g., Dinlersoz et al., 2021 for the US and
Fritsch et al., 2021 for Germany) and net entrepreneurial flows
(e.g., Fairlie, 2020). However, to the best of our knowledge, none
of the existing studies analyzes how the COVID-19 shock heteroge-
neously affected new entrepreneurial households or what the im-
plications were for the types of new startups created.
In this paper, we provide an answer to these questions by an-
alyzing real-time data from the COVID-19 recession. Specifically,
we provide in-depth analysis of a new extensive survey of more
than 24,0 0 0 households on their entrepreneurial attitudes and de-
cisions (the 2020 wave of the Global Entrepreneurship Monitor –
GEM – survey for Spain). The data are representative of the whole
adult population of Spain, and rich and detailed enough to al-
low us to disentangle the main drivers of firm creation during
COVID-19 while controlling for individual characteristics. Further-
more, since this survey has been conducted (as a repeated cross
section) since 1999, we can compare our findings to the character-
istics of firm entry during the Great Recession of 2008–2010. Im-
portantly, the 2020 survey, while including all questions consistent
with the surveys in previous years, also includes a set of additional
questions on the COVID-19 recession (for example, asking whether
the households directly suffered a loss of income because of the
pandemic or whether they had new business opportunities), which
allow us to disentangle the different factors driving our results.
Our main findings are as follows. Controlling for population
characteristics (age, gender, income, and education), we find that
the overall decline in the startup rate during the 2020 COVID-19
recession was large and of a similar magnitude to the decline dur-
ing the Great Recession years. Entry declined by approximately 40%
with respect to the long-run average entry rate (1.7 pp). More-
over, the decline in firm entry has been more concentrated among
startups with high growth potential, as also happened during the
Great Recession.5
More importantly, we find that the COVID-19 recession and
the Great Recession present striking differences regarding the im-
pact on households with different income levels. During 2020, the
drop in firm entry was entirely concentrated among low- and
medium-income households. In fact, we find no reduction in en-
try among high-income households (defined as the top tercile in-
4
At the begining of the COVID-19 crisis, policy measures typically did not tar-
get startups specifically, and many liquidity relief measures were not accessible for
early stage entrepreneurs or new firms because of their eligibility criteria. While
countries like Germany, France or Italy introduced later dedicated startup packages,
other countries like Spain did not take new actions targeting specifically new busi-
nesses. See OECD (2021) for further information about policy support for startups
in OECD countries.
5
Furthermore, a preliminary analysis of the 2021 GEM survey shows that there
was no ‘catching-up’ during 2021 for low- and medium-income households, while
there is still a positive effect for high-income households, which is around half as
large as that of 2020.
2
Journal of Banking and Finance 149 (2023) 106779
come group). Furthermore, the changes in entry composition to-
wards low-growth firms only occur among low- and medium-
income households, while it increases among high-income house-
holds. These results, which hold when we control for education
and age interacted with the recession dummies, are surprising and
at odds with the patterns during the Great Recession, during which
high-income households suffered a stronger decline in entry than
those with medium or low income. The reason for this divergence
is likely to be related to the different nature of the shock: during
the Great Recession, Spain suffered a huge burst in the housing
bubble. Households in the upper tercile of income are more likely
to own real estate, which is often used as collateral for new credit,
and hence they were more affected by this shock. In addition, we
show that these differential results are not driven by an uneven
surge in necessity entrepreneurs among income groups.
Next, we explore whether conditional on starting a firm, en-
trepreneurs with different income levels select different financing
sources, and how such selection changed during COVID-19. Regard-
ing the sources of funds, the last 4 waves of the survey (2017–
2020) include detailed information on the amount of initial financ-
ing of startups and the main sources used to finance them. Con-
sistent with other studies, the survey shows that smaller startups
are mostly internally financed, while larger startups are more in-
tensely bank-financed, a finding consistent with the pecking or-
der of finance. During COVID-19, in addition to observing a re-
duction in startups from low/middle-income households, we also
see that they greatly increased the use of their own savings (rela-
tive to the other sources), while we do not observe the same in-
crease for high-income households. This finding is consistent with
a tightening of financial conditions (in line with the findings of
Ferrando and Ganoulis, 2020), pointing at financial frictions being
important in explaining the different performance of entrepreneurs
along the income distribution. One possible alternative explana-
tion is that instead there were fewer opportunities of smaller size
for low-income entrepreneurs than for high-income entrepreneurs.
Because opportunities were smaller, internal finance was used rela-
tively more than in the pre-COVID years, since the cheapest source
of funds is used first. This alternative story would imply that in-
ternally financed projects should be on average smaller during
COVID-19 than in the pre-COVID-19 years, because such smaller
size is the necessary condition for observing an increase in the rel-
ative use of internal finance. However, our results do not find any
evidence of this. We are also able to rule out that a possible lack
of entrepreneurial skills of low-income households impeded them
from exploiting new business opportunities during the pandemic.
For this, we show that our main findings are robust to only includ-
ing the subset of entrepreneurs that reports having the relevant
skills for opening a business.
We then explore whether the COVID-19 recession, in addi-
tion to negatively affecting the income and wealth of many en-
trepreneurial households, also presented new opportunities, which
were disproportionately taken by high-income households because
of their larger wealth and better access to external finance. We
find empirical evidence consistent with this explanation using de-
tailed information on the type of business created and on the
sources of funds used to create them. We use the unique infor-
mation provided in the GEM surveys, where entrepreneurs de-
scribe in their own words the kind of business they are intend-
ing to create, to precisely identify new business that are digital
and internet-oriented. Our results show that the fraction of digital
businesses increased during COVID-19, and that this increase was
entirely driven by high-income households, for which we observe
a 70% increase in digital startups relative to the 2011–2019 period.
As robustness, we check whether these results are driven by
possible confounding factors. One potential explanation for the
findings above is that low- and middle-income households are
C. Albert, A. Caggese, B. González et al.
more likely to be engaged in sectors directly affected by the pan-
demic (e.g. leisure and hospitality, and transport), or in businesses
that require more face-to-face interaction than the businesses of
high-income households, and therefore are more directly exposed
to the COVID-19 shock. However, we find no evidence supporting
this. Our results show that high-income households did much bet-
ter during COVID-19 than the other households in terms of entry
into entrepreneurship in the non-affected sectors, while we find
a smaller difference in the affected sectors. Furthermore, it seems
that results are not driven by the ‘size’ of the negative income
shock received by the household: the difference between high-
and medium/low-income households was particularly large among
those that did not suffer a negative income shock during the pan-
demic.
Therefore, although we cannot completely rule out possible al-
ternative explanations, a plausible interpretation of our findings is
that low- and medium-income households had similar opportuni-
ties as high-income households, but because of more difficult ac-
cess to external financial resources, many could not exploit them
(more difficulty accessing banks and perhaps also more difficulty
accessing family and friends because these sources increased their
precautionary savings). Thus, while the funding channel is un-
likely to be the sole driver of the large drop in the startup rate
in 2020, these findings highlight that the constrained access to
finance for low- and middle-income entrepreneurial households
was an important reason for why their entrepreneurial activity
was much more negatively affected than that high-income house-
holds.6 Their implication is that, while policies directed at sup-
porting current jobs during a pandemic are important, to ensure
a durable recovery in the future, they should be accompanied by
measures directed at reducing the cost of credit for new potential
entrepreneurs.
Finally, in order to gauge the long-term consequences of these
results on aggregate employment, the last section of the paper
summarizes the findings of Appendix B, where we match GEM sur-
vey data with firm-level panel data from Central de Balances In-
tegrada. We estimate that the employment of the 2020 cohort of
firms is expected to be 2.4% smaller after 10 years because of the
“missing generation” of low- and medium-income entrepreneurs.
2. Related literature
An extensive body of research suggests that there is a meaning-
ful association between income inequality and entrepreneurial out-
comes (Bruton et al., 2021; Packard and Bylund, 2018; Halvarsson
et al., 2018). In particular, our paper is related to recent research
arguing that inequality might hamper entrepreneurship (Braggion
et al., 2021, Lee et al., 2022). Braggion et al. (2021) consider a mea-
sure of wealth inequality at the US county level, based on the dis-
tribution of financial rents, and find that more inequality leads to
a substantial decline in new establishments’ entry, especially for
new startups that are not offsprings of already existing firms. As a
possible explanation of their findings, they indicate that wealth in-
equality comes with less provision of public goods considered im-
portant for business formation and economic growth, such as ex-
penditure in education and in the efficiency of the justice system.
In common with Braggion et al. (2021), our paper also considers
the effect of inequality on entrepreneurial entry. Differently from
them, we focus on detailed micro data for the COVID-19 pandemic
in Spain, and highlight a novel mechanism: high-income house-
holds performed relatively better during the COVID-19 pandemic
6
Evidence of financial frictions for new startups is also reported in
Brown et al. (2020), who found that new equity transactions in the UK de-
clined markedly during COVID-19, with seed financing being the main type of en-
trepreneurial finance most acutely affected.
3
Journal of Banking and Finance 149 (2023) 106779
as they had more financial resources, and likely better access to
external funding to exploit new business opportunities. The fo-
cus on financial factors is also in Lee et al. (2022) who exploit
the variation in top incomes across US states to show that an in-
crease in the top 10% income share reduces the job creation rate
of small firms, relative to large firms. The channel they highlight is
that low-income households hold a higher share of their financial
wealth in the form of bank deposits than high-income households,
thus providing more funding for local banks and reducing borrow-
ing costs for small firms. Our work is complementary to theirs
since we focus on the effects of inequality and financing conditions
on the creation of new startups rather than on the performance of
incumbent firms.
Because of its emphasis on financial factors, our paper is
more generally related to the literature that emphasises the im-
portance of financial frictions on entrepreneurship. Corradin and
Popov (2015) show that housing wealth helps to alleviate credit
constraints for potential entrepreneurs by enabling homeowners to
extract equity from their property and invest it in their business.
Our main contribution to this strand of literature is to show how
income differences were critical for entrepreneurial outcomes dur-
ing COVID-19, and to present evidence that financial frictions af-
fecting differently low- and medium-income households are a key
determinant of this finding.
Our paper also relates to a growing strand of literature attempt-
ing to assess the impact of the COVID-19 shock on businesses and
entrepreneurship. While a large literature examines the different
ways that COVID-19 impacted several aspects of incumbent firms’
and entrepreneurs’ behavior, fewer papers analyze the impact of
COVID-19 on the entry margin.7 Ascari et al. (2021) document an
asymmetric impact of the COVID-19 shock on business applica-
tions in the US, and using a firm dynamics model, they can ra-
tionalize the dynamics of entry and aggregate productivity during
the crisis. Benedetti-Fasil et al. (2020) propose a “Startup Calcula-
tor”, which uses historical data to extrapolate entry, growth and
survival rates of firms from different cohorts under the COVID-19
shock. While their work is based on historical data, our contribu-
tion is to use timely new survey data on entrepreneurship during
the COVID-19 crisis to study its impact on entry across the income
distribution, the type of firms’ entry, and on the long-run implica-
tions. Our paper is especially related to Dinlersoz et al. (2021) and
Haltiwanger (2022). They use data on new business applications
and transitions to employer businesses in the US to find that the
decline in business applications was transitory, but that there was
a change in composition of entry towards non-employers. Our pa-
per complements their findings and enriches them thanks to the
use of survey data: while we also find a change in the composi-
tion of entrants, we can dig deeper into the causes of this change
and link it to income inequality and financial frictions.8
7
The papers that analyze the effects on incumbent firms focus on liquidity needs
(Schivardi and Romano, 2020), financial constraints (Ferrando and Ganoulis, 2020,
Balduzzi et al., 2020), firms’ activity (Hassan et al., 2020, Fairlie, 2020, Bartik et al.,
2020), policy support (Groenewegen et al., 2021, Core and De Marco, 2021), firms’
ownership (Amore et al., 2022) and economic beliefs (Armantier et al., 2021; Di-
etrich et al., 2022), among other aspects. Other papers focus on the exit mar-
gin instead, such as Gourinchas et al. (2020), Zoller-Rydzek and Keller (2020) or
Hoshi et al. (2022).
8
While they find that the decrease in entry was very short lived and rebounded
over the course of 2020, we find that the fall in entry was more persistent and that
it lasted at least throughout 2020. There are several potential reasons that can ra-
tionalize these different findings. First, the policies implemented and institutional
background in the US and Spain differ greatly. Second, and most important, while
our survey data capture entrepreneurial startups, data on business applications cap-
ture all new businesses that are created, which might be part of a larger group. In-
deed, Bahaj et al. (2021) show that in the UK, business registrations increased dur-
ing COVID-19 but that these new registrations are mostly driven by existing groups
opening new businesses, in particular in online retail and in metropolitan areas.
C. Albert, A. Caggese, B. González et al.
Fig. 1. COVID-19 and Firm Entry. Notes: Source: OECD (2020) ”Business dynamism during the COVID-19 pandemic: Which policies for an inclusive recovery?”, OECD Re-
sponses to Coronavirus (COVID-19), OECD, Paris.
The rest of the paper is organized as follows. Section 3 presents
the data used in the analysis and preliminary descriptive evi-
dence of the COVID-19 shock. Section 4 presents the empirical
analysis. Section 4.1 shows the impact of the COVID-19 shock on
entry and its composition. Section 4.2 shows the heterogeneous
entrepreneurial choices during COVID-19 depending on ex ante
characteristics: the income distribution and the impact on ne-
cessity entrepreneurs. Section 4.3 shows the heterogeneous en-
trepreneurial financing during COVID-19. Section 4.4 presents the
new entrepreneurial opportunities due to COVID-19 and the het-
erogeneity in their implementation. Section 4.5 presents robust-
ness checks that exclude alternative explanations for the results:
Section 4.5.1 shows the results are not driven by differences in sec-
toral composition; and Section 4.5.2 shows the heterogeneous en-
trepreneurial choices during COVID-19 depending on the income
shock received. Section 4.6 briefly describes the results shown in
Appendix B on the estimation of the medium- and long-term job
losses caused by the drop in entrepreneurship among low- and
middle-income households. Section 5 concludes the paper.
3. Data and descriptives
In our empirical analysis, we use data from a large multi-
country entrepreneurship dataset to investigate the impact of the
COVID-19 shock on the decisions to start businesses with heteroge-
neous growth potential. The great advantage of our analysis is that
we have access to the 2020 wave of the survey for Spain, which is
restricted to the general public and only published with an approx-
imately 2-year delay. This provides us with a unique early picture
of the impact of the COVID-19 shock on entrepreneurial decisions.
4
Journal of Banking and Finance 149 (2023) 106779
3.1. The COVID-19 economic shock
The COVID-19 pandemic has been an unprecedented shock
for the world economy. Governments have imposed public health
measures, such as social distancing, halting the flows of goods and
people and stalling the economy, which caused the largest drop in
GDP in developed countries witnessed during peacetime. The GDP
contraction in 2020 in the EU was of historical proportions, de-
spite the largely supportive fiscal and monetary policy measures:
according to Eurostat, GDP fell by 10.8% in Spain, 8.9% in Italy, and
4.6% in Germany. There were swift and resolute policy measures
to support incumbent firms, with the aim to avoid mass exit of
firms due to a temporary shock.9 However, in Spain there was no
specific policy measure to support newly created businesses, which
might have affected the entrepreneurship decision and the creation
of firms.
3.2. Firm entry after the COVID-19 shock
By reducing demand, increasing uncertainty and tightening fi-
nancing conditions, the COVID-19 shock significantly affected new
business formation. However, the drop in firm entry has been het-
erogeneous across countries. Figure 1 shows the number of busi-
ness registrations for different OECD countries. Although all coun-
9
Actually, in many countries exit of firms suffered a very mild increase, or even
decreased, in the early stages of the pandemic. Indeed, while during the Great Fi-
nancial Crisis (GFC) in 2008 entry rates decreased and exit rates increased in similar
proportions; during 2020 entry fell sharply, even more than during the GFC, while
the increase in exit rates was very mild, even lower than that of 2019. See Fig. C.4 in
Appendix C.
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Fig. 2. Firm entry in Spain. Notes: Data at monthly frequency is from INE (https://www.ine.es/jaxiT3/Tabla.htm?t=13912). Panel A shows the deseasonalized number of new
firms entering (“Constituidas”), which only includes firms recognized as independent legal entities. Entry in March 2019 is normalized to 1. Panel B shows the cumulative
deviations from the trend since the beginning of the crisis for the Great Recession (month 0 is April 2008) and the beginning of the COVID-19 shock (month 0 is Februrary
2020).

tries suffered a drop in business registrations during the lockdown

period (March and April 2020), the severity and persistence of the
drop in entry was very heterogeneous.
In this section, we provide additional evidence for Spain. Fig. 2,
Panel A, shows the deseasonalized number of new firms entering
(new incorporations) in Spain, with average entry being approxi-
mately 80 0 0 firms per month before the shock. The largest drops
are in April and May 2020, with entry falling 75% and 64% relative
to the average value, respectively. It seems likely that this large
drop in entry is not only caused by movement restrictions, but
also by the worsening of the economic conditions and increase in
uncertainty. This is plausible both because the large drop in entry
continued in May when restrictions were being lifted and because
entry in the upcoming months did not fully rebound, remaining
below its average until July 2020. This implies a sizable cumulative
deficit in firm entry, as shown in Fig. 2, Panel B: the cumulative
drop in firm entry in the first 4 months after the beginning of the
pandemic is as large as that of the first 8 months after the be- Fig. 3. Entry according to GEM. Notes: The figure plots the year fixed effects ob-
ginning of the Great Recession. Even after 15 months, this entry tained from a regression using a dummy indicating a new entrepreneur as depen-
gap remains present. This suggests a missing generation of firms, dent variable, in which we add (demeaned) controls for gender, age, age squared,
which is likely to have important short- and long-run effects. a dummy for being in the top tercile of income and a dummy for high educational
level.

3.3. Global entrepreneurship monitor dataset (GEM)

The main objective of this paper is to analyze how the COVID-
19 crisis affected the incentives of heterogeneous entrepreneurs to
start a firm, focusing especially on income heterogeneity. Moreover,
we analyze the implications for both overall firm creation and the
nature of the new startups. We use the yearly 2005–2020 Span-
ish waves of the Global Entrepreneurship Monitor (GEM) database.
The GEM research program is a project that focuses on one of the
crucial drivers of economic growth: entrepreneurship. GEM began
in 1999 as a joint research project between Babson College (USA)
and London Business School (UK). GEM is the largest annual in-
ternational research initiative that collects and analyzes data on
various forms of entrepreneurial activity. The main idea of the
project is to provide essential entrepreneurship-related knowledge
by gathering harmonized data on an annual basis and across coun-
tries, facilitating international comparative analysis (Reynolds et al.,
2005). Specifically, we use the individual observations from the
Adult Population Survey (APS) of the Spanish GEM project. The APS
allows us to obtain a representative sample of the Spanish popula-
tion aged 18 to 64. The overall number of individuals in our sam-
ple ranging from 2005 to 2020 is 390,0 0 0. GEM captures a com-
prehensive variety of entrepreneurial outcomes and assesses en-
trepreneurial efforts at different stages of firm development rang-
ing from nascent to established phases. The GEM 2020 dataset is
particularly useful for us since it measures entrepreneurial efforts
occurring during the pandemic. Data collection in 2020 started in
mid-July 2020 and ended in early November 2020.
To identify entrepreneurs starting a firm, we use the question
‘Are you, alone or with others, currently trying to start a new busi-
ness, including any self-employment or selling any goods or services
to others?’ (Reynolds et al., 2005). If the individual answers ‘Yes’ to
this question, we classify him or her as a new entrepreneur.10 Our
sample contains approximately 16,500 new entrepreneurs, 4.25% of
all individuals in our sample. Figure 3 shows the time series of en-
10
Our definition of new entrepreneurs differs from the one used by the GEM
project, where new entrepreneurs are those between 3 to 42 months old. In our
case, we are interested in new entrepreneurs who started during the pandemic.

5
C. Albert, A. Caggese, B. González et al.
Fig. 4. Motives for business creation, 2019 vs 2020. Notes: The bars show the percent of entrepreneurs giving the indicated answers on questions in the 2019 and 2020 GEM
waves on the motives for their decision to start a business.
try according to this definition from the GEM database, net of any
effects due to changes in the demographic composition of respon-
dents over time.11 We can observe a sharp decrease in entry dur-
ing the Great Recession and also a strong drop of more than one
percentage point during the COVID-19 crisis.
Furthermore, we classify startups as having low/high growth
potential by using the expected number of employees of the firm
five years into the future reported by new entrepreneurs: if their
expected size in five years exceeds the average size of the estab-
lished firms at the sector level, we classify this firm as a high-
growth type. Approximately 35% of startups fall in the high-growth
category.12
3.4. A first look at the effects of the pandemic on new and
established entrepreneurs
We first explore how the motives that entrepreneurs indicate as
drivers of their decision to start a new business changed in 2020
with respect to the previous year.13 Figure 4 shows the percentages
of entrepreneurs in each of the five categories that capture the de-
gree of agreement (from strongly disagreeing to strongly agreeing)
11
In particular, the figure plots the year fixed effects obtained from a regression
using a dummy indicating a new entrepreneur as dependent variable, in which we
add demeaned controls for gender, age, age squared, a dummy for being in the top
tercile of income and a dummy for high educational level (see Appendix A.2 for de-
tails on the variable definitions). Thus, the year fixed effects are the average starting
probabilities by year conditional on the controls being at their sample means.
12
Details on the classification of startups and other variables used in the analysis
and a discussion about the validity of this high-growth measure during COVID-19
are shown in Appendix A.
13
This question on the motives for business creation is not available before 2019.
6
Journal of Banking and Finance 149 (2023) 106779
with four different motives: making a difference in the world, ac-
cumulating wealth, continuing a family tradition, and jobs being
scarce. We observe pronounced shifts, particularly for the first and
fourth motive, in 2020 relative to 2019. Many more entrepreneurs
strongly disagree that their motive is to make a difference in the
world in 2020 (26% instead of 15%). Moreover, for many more, the
scarcity of jobs is the decisive factor. The percentage that strongly
agree that scarce jobs is a motive for them increases from 18%
to 29%. Interestingly, we observe both an increase in the share
of households who strongly agree and strongly disagree with the
statement that the main motive to start a firm is to accumulate
wealth. Thus, it seems that the division into those that see the new
business as an opportunity to increase their wealth and those that
have nonpecuniary motives became stronger during the COVID-19
crisis. The figure suggests that the latter are probably driven into
entrepreneurship particularly because it became more difficult to
find regular employment.
Figure 5 shows the responses to a set of questions added to the
2020 survey intended to shed light on how COVID-19 has impacted
the entrepreneurial decisions and businesses of respondents. Some
of these questions are asked to new entrepreneurs and some to
owners of established businesses. Moreover, the question on how
the pandemic impacted household income shown on the bottom
right is asked to all respondents. Due to the potentially very differ-
ent personal impact of the crisis depending on income, we show
separate results for respondents with low and with high household
income.
There are three main findings to highlight. First, COVID-19 sig-
nificantly impacted new business activity. Among those with low
income, 60% strongly agree that the pandemic led to a delay in get-
ting the business operating, while the corresponding share among
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Fig. 5. Business and the COVID-19 Pandemic. Notes: The bars show the percent of respondents giving the indicated answers on COVID-19 related questions taken from the
GEM 2020 wave.

7
C. Albert, A. Caggese, B. González et al.
those with high income is approximately 50%. Among those man-
aging an incumbent firm, approximately 50% claim that their firm
had to stop some of its activities. Second, COVID-19 generated
a large income shock: nearly half of the respondents claim that
their household income decreased due to the pandemic. Third,
there is also substantial heterogeneity in the impact of the shock
on the expectations for business growth depending on the pre-
pandemic level of income: more than 57% of low-income respon-
dents have the expectation that business growth will be lower
compared to 2019 (adding those who say “somewhat lower” and
those who say “much lower”), versus only 44% of high-income en-
trepreneurs. Furthermore, nearly 74% of low-income respondents
feel that starting a business is more difficult than in 2019, while
only 65% of high-income respondents do so. The expectation to
start a new business is influenced by the pandemic in 51% of
the answers, and this response is relatively homogeneous between
those with high and low income. When starting a firm, 60% of
low-income entrepreneurs strongly disagree with COVID-19 offer-
ing new opportunities to exploit, while this is the case for 50%
of the high-income respondents. Among already established en-
trepreneurs, 73% of low-income entrepreneurs and 64% of those
with high income strongly disagree with the pandemic leading to
new business opportunities.
These results indicate a differential impact of the COVID-19
shock along the income distribution, suggesting that ex ante in-
come inequality is potentially important to understand the impact
of the COVID-19 shock on entry and its composition. Specifically,
it could be that households at the bottom of the income distribu-
tion suffered a larger income decrease and/or suffered from lack
of opportunities, hence preventing them from starting a firm dur-
ing COVID-19. Moreover, while the GEM survey does not directly
ask about financial constraints, the ECB’s Business Lending Survey
(BLS) and Survey on the Access to Finance of Enterprises (SAFE) re-
port a worsening of credit availability for small businesses in Spain
during 2020 (see Fig. C.3 in the Appendix). Therefore, it could
also be that access to finance was tightened during COVID-19, es-
pecially for low-income potential entrepreneurs, preventing them
from gathering sufficient funds to start a firm and potentially im-
pacting the kind of firm they want to start (low vs. high growth).
The next section provides a regression-based analysis that charac-
terizes the changes in the entry decision and composition of entry
of entrepreneurs and allows us to quantify the importance of these
different factors.
4. Empirical analysis
In this section, we estimate the effect of the COVID-19 shock
on overall startup creation and on the creation of different
startup types conditional on the observable characteristics of en-
trepreneurs. Based on our classification described on Section 3.3,
s
we create a set of dummies starti,r,t indicating that individual i in
year t is starting a firm of type s ∈ (a, h ) in region r, where a in-
dicates all startups and h startups with high growth potential, re-
spectively.14 We use starti,r,t
s as the dependent variable in the fol-
lowing model:

K match the most recent official data descriptions of the population of a country.” Our
s
starti,r,t = β0s + β1s COV ID-19t + β2s GRt + γks Xi,tk + θr + εi,r,t . (1)
k=0
We include a dummy COV ID-19T that takes value 1 for t =
2020, 0 otherwise. For comparison, we include GRT , which is a
14
We use the autonomous communities level to define a region. The Spanish ter-
ritory is divided into 17 autonomous communities and 2 autonomous cities, which
are the second-level territorial and administrative divisions NUTS 2 under EURO-
STAT classifications.
8
Journal of Banking and Finance 149 (2023) 106779
dummy that takes value 1 during the Great Recession (2009 and

2010), 0 otherwise.15 The term Kk=0 γk Xi,t k in Eq. (1) indicates the
K individual control variables. The controls include gender, age, ed-
ucational level, and income category to account for differences in
ex ante characteristics. We also include controls for individual per-
ceptions: perception of skills to start a new firm, perception of fear
of failure and expected opportunities within 6 months.16 These
characteristics control both for ex ante characteristics (ability, risk
aversion) and for endogenous perceptions of opportunities.17
4.1. The effect of the COVID-19 shock on startup creation
Table 1 shows the baseline results of running regression (1). In
Columns (1) and (3) we include all the observations, and the de-
pendent variable is a binary variable equal to one if the household
starts a firm of any type, zero otherwise. Conversely, in Columns
(2) and (4) we keep only the observations of entrepreneurs enter-
a = 1), so the coefficients can be interpreted
ing (those with starti,t
as the effects on the share of high-growth firms entering. Column
(1) shows that after controlling for observables, the likelihood of
starting a firm is significantly lower in 2020: households are 1.7
pp less likely to start a firm during COVID-19 than in the rest of
our sample years. Since the average likelihood of starting a firm
is 4.25%, this decrease would imply a 40% drop in the likelihood
of entry. The decrease is slightly lower than in the Great Reces-
sion (1.9 pp). Furthermore, column (2) shows that there was a sig-
nificant decline in high-growth firms entering as their share de-
creased by 6.2 pp. The average share of high-growth firms among
entrants is 35%, so this would imply an 18% decrease. Despite be-
ing slightly smaller quantitatively, all results are robust to also in-
cluding controls for skills and perceptions in Columns (3) and (4).18
This confirms the findings from the descriptive evidence shown be-
fore. That is, the pandemic has decreased the likelihood of starting
a firm and hence firm creation. Moreover, these results suggest a
potentially relevant composition effect: not only has firm entry de-
creased, but also the composition of firm entry has changed, with
a lower share of high-growth firms entering. In the next sections,
we explore different motives for this change in composition and
perform some robustness tests on these results.
4.2. Heterogeneous entrepreneurial choices during COVID-19
depending on income
In this section, we investigate how the previous results vary
across heterogenous households. Our main dimension of interest
is the income distribution.19 To investigate whether the impact of
the COVID-19 crisis was heterogeneous depending on household
income, we estimate a version of Equation (1), in which we al-
low the COVID and GR coefficients to vary across household groups
defined by income level. For this, we interact these variables with
15
Although the recession in Spain started during the second half of 2008, the
drop in entrepreneurship was visible starting in 2009, see Fig. 3.
16
We weight observations by using the weight variable for the 18–64 labor force
included in the GEM. According to the description of the GEM, the weights are “de-
veloped such that proportions of different subgroups (gender and age, for example)
results are robust to not weighting the observations.
17
See Appendix A.2 for a detailed definition of all the variables.
18
The results are also robust to introducing a time trend.
19
One could argue that it is wealth and not income which might be more rele-
vant for the entrepreneurship decision. There is no wealth available in GEM, and
hence we cannot use this variable directly. However, income and wealth in Spain
are highly correlated: the top 10% of the wealth distribution have 56,800 euros of
median income, which is close to the median income for the 20% households with
the highest income – 55,100 euros – (Banco de España, 2019). Because of this, our
measure of high income households can be understood as a proxy of high wealth
households.
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table 1
Probability to start a firm during COVID-19.

(1) (2) (3) (4)

Start High Growth Share Start High Growth Share

COVID-19 -0.017∗ ∗ ∗ -0.062∗ ∗ ∗ -0.013∗ ∗ ∗ -0.051∗ ∗ ∗

(0.0017) (0.0186) (0.0017) (0.0190)
GR -0.019∗ ∗ ∗ -0.070∗ ∗ ∗ -0.018∗ ∗ ∗ -0.071∗ ∗ ∗
(0.0019) (0.0229) (0.0017) (0.0226)
Female -0.016∗ ∗ ∗ -0.047∗ ∗ ∗ -0.007∗ ∗ ∗ -0.045∗ ∗ ∗
(0.0011) (0.0139) (0.0010) (0.0138)
Age 0.004∗ ∗ ∗ -0.007 0.002∗ ∗ ∗ -0.007
(0.0003) (0.0047) (0.0003) (0.0047)
Age squared -0.000∗ ∗ ∗ 0.000 -0.000∗ ∗ ∗ 0.000
(0.0000) (0.0001) (0.0000) (0.0001)
High Income 0.018∗ ∗ ∗ 0.037∗ ∗ 0.012∗ ∗ ∗ 0.034∗ ∗
(0.0025) (0.0159) (0.0025) (0.0159)
Educated 0.014∗ ∗ ∗ 0.034∗ ∗ ∗ 0.007∗ ∗ ∗ 0.031∗ ∗ ∗
(0.0015) (0.0118) (0.0014) (0.0118)
Expected Opport. 0.044∗ ∗ ∗ 0.017
(0.0024) (0.0118)
Fear -0.019∗ ∗ ∗ -0.014
(0.0011) (0.0135)
Skill 0.062∗ ∗ ∗ 0.039
(0.0020) (0.0238)
Constant -0.003 0.462∗ ∗ ∗ -0.007 0.434∗ ∗ ∗
(0.0053) (0.0918) (0.0053) (0.0902)
Observations 389,426 9234 389,426 9234
R-squared 0.009 0.010 0.043 0.011

Notes: Outcomes of estimating OLS regression. The dependent variable takes the value 1 if the
individual is starting a firm, 0 otherwise. Columns (1) and (3) show the results for starting
any firm, Columns (2) and (4) for starting a high growth firm conditional on starting a firm.
COV ID-19 is a dummy that takes the value 1 in 2020, and 0 otherwise. GR is a dummy for the
Great Recession, which takes a value of 1 if the year is 2009 or 2010, 0 otherwise. Controls
include sex, age and age squared, a dummy for post-secondary education, income and region
fixed effects. Columns (3) and (4) include controls for individual perceptions: perception of
skills to start a new firm (Skill), perception of fear of failure (Fear) and expected opportunities
within 6 months (Expected Opport.). Standard errors are clustered at the region-year level.

High Income, which is a dummy equal to one if the income level of Table 2
Probability to start a firm during COVID-19: High vs Low income.
the entrepreneur is within the upper tercile of the distribution.20
The results, shown in Table 2, imply that the likelihood of start- (1) (2) (3)
ing a firm for low- and medium-income households decreases by Start High Growth Share Necessity Share
1.7 pp during COVID-19, while the share of high-growth startups COVID-19 -0.017∗ ∗ ∗ -0.109∗ ∗ ∗ 0.347∗ ∗ ∗
decreases by 10.9 pp. However, this is not the case for high-income (0.0014) (0.0287) (0.0217)
households, for whom the probability of starting a firm remains COVID-19 x High Income 0.019∗ ∗ ∗ 0.134∗ ∗ ∗ -0.012
(0.0062) (0.0438) (0.0485)
almost unchanged (-1.7 pp+1.9 pp=0.2 pp), and the share of high-
GR -0.014∗ ∗ ∗ -0.068∗ ∗ ∗ -0.042∗ ∗
growth firms even increases (-10.9 pp+13.4 pp=2.5 pp). This het- (0.0020) (0.0208) (0.0189)
erogeneity across income levels in terms of the impact of the shock GR x High Income -0.013∗ ∗ ∗ -0.005 0.025
is very different from that observed during the Great Recession, (0.0041) (0.0360) (0.0247)
Controls Yes Yes Yes
during which firm creation actually fell more among high-income
Observations 389,426 9234 15,839
households.21 Crucially, in our analysis of the relationship between R-squared 0.043 0.012 0.044
the income level and entrepreneurial activity before and during the
Notes: Outcomes of estimating OLS regression. The dependent variable takes the
pandemic, we also have to take into account that both these mea-
value 1 if the individual is starting a firm, 0 otherwise. Column (1) shows the re-
sures are likely to be correlated with unobservable skills to create sults for starting any firm, Column (2) the results for starting a high growth firm
a new business. For instance, if those with higher income have dif- conditional on starting a firm, and Column (3) the results for starting a necessity
ferent types of skills than those with lower income and precisely firm conditional on starting a firm. A necessity entrepreneur is a new entrepreneur
these skills mattered more for business creation during the pan- that starts a firm because of lack of employment. COV ID-19 is a dummy that takes
the value 1 in 2020, and 0 otherwise. GR is a dummy for the Great Recession, which
demic, we would uncover a spurious change in the relationship
takes a value of 1 if the year is 2009 or 2010, 0 otherwise. High income is a dummy
between income and startup creation during the pandemic. While, that takes the value 1 if the individual is in the upper 33th income percentile. Ad-
due to the nature of our data, we cannot entirely rule out that het- ditional controls include sex, age and age squared, education, income, individual
erogeneity in unobservable skills partly drives the results we show perceptions of skills to start a new firm, perception of fear of failure, expected op-
portunities within 6 months and region fixed effects. Standard errors are clustered
in the following, we control for several variables that are, arguably,
at the region-year level.
good proxies for unobservable skills. In particular, we consider het-

20
We consider this definition of income inequality (first tercile of the income dis-
tribution versus the rest) because of data limitations. The surveys do not provide
exact household income, only whether households belong to the first, second, or
third tercile of the income distribution.
21
We will discuss about this difference in the next section, which examines en-
trepreneurial financing during COVID.
erogeneity in terms of age and education and also allow their ef-
fects to be different during the pandemic and the Great Recession
by including them as interaction terms similar to the income level.
The results are in Table C.1 in the Appendix. Educated is a dummy
equal to one if the entrepreneur has post-secondary or graduate
experience, and Young is a dummy equal to one if the entrepreneur

9
C. Albert, A. Caggese, B. González et al.
is younger than 35 years old. First, we can see that the coefficients
on the interaction with high income are nearly unchanged and re-
main significant, which indicates that this level of heterogeneity is
relevant even after controlling for the education and age interac-
tions. Second, Column (1) shows that, during COVID-19, being ed-
ucated decreases the likelihood of starting a firm by 0.7 pp, while
being young decreases the likelihood of starting a firm by 1 pp.
This suggests that these variables are relevant to explain the het-
erogeneous decrease in startups, although they are quantitatively
less important than income. Column (2) unveils an important find-
ing: only income heterogeneity during the pandemic matters for
the change in the composition of entry because the coefficients on
young and educated are not significant.
In Table C.2 in the Appendix, we conduct an additional check
of the robustness of these results by running the regression in
Columns (1) and (2) of Table C.1 splitting the sample into two
subgroups. In the first two columns, we include only those who
report having the skills required to start a new business. In the
last two columns, we include only those who report not having
these skills.22 If such skills mattered more for setting up a busi-
ness during the COVID-19 crisis and are correlated with income,
we would expect no significant effect of COVID-19 x High Income
after splitting the samples. Indeed, 43% of those with low income
but 53% of those with high income report having these skills. How-
ever, in both subsamples, we obtain coefficients that are qualita-
tively and quantitatively similar to those in the full sample. Hence,
the (small) correlation of income with self-reported skills for start-
ing a business is also not driving our results.23 In Table C.3 we sat-
urate the model with additional fixed effects. In column (1), we in-
clude region-year dummies, which absorb any region-specific time
trends. Note that this implies that we cannot identify the main ef-
fects of COVID-19 and GR anymore, as they are themselves year
dummies. Thus, we only display the still identified interactions
with high income. In columns (2) and (3), where we only consider
starters, we additionally include sector-year dummies.24 All shown
coefficients are robust to adding these fixed effects.
In sum, we find that heterogeneity in income levels is the rel-
evant dimension affecting entrepreneurship during the COVID-19
crisis, both for the choice of starting a firm and for the type of
firm entrepreneurs start (high growth versus low growth).
Necessity entrepreneurs and COVID-19
One of the underlying reasons for the heterogeneity we uncov-
ered might be the motivation for why entrepreneurs start a firm
in the first place – if entrepreneurs create a firm simply out of
necessity and not out of intrinsic motivation, then these firms are
likely to have lower growth potential. We explore this angle by ex-
ploiting a question in the survey asking respondents ‘Why did you
start a firm?’. We label an entrepreneur as starting a necessity firm
if the answer to this question is ‘To earn a living because there is
scarcity of jobs’. These types of subsistence firms are usually as-
sociated with low growth and hence might be another important
22
The exact question is ‘Do you have the knowledge, skill and experience re-
quired to start a new business?’. Several studies argue that motivation and perfor-
mance achievement are controlled by individual socio-cognitive mechanisms such
as self-efficacy (i.e., perception of skills to start a business), which in turn can
influence entrepreneurs’ inclination to take part in entrepreneurial projects (e.g.,
Boudreaux et al., 2019). In entrepreneurship studies, self-efficacy accounts for the
beliefs of entrepreneurs towards their own skills and capabilities to start and de-
velop a new venture (McGee et al., 2009).
23
Only in Column (4) of Table C.2, in which the sample only includes those start-
ing a business, are the coefficients of interest not significant This is because the
number of observations is only approximately 10 0 0 as very few of those reporting
not having business skills are entrepreneurs.
24
Since sector information is only available for those that start a business, we
cannot include these fixed effects in the regression in column (1).
10
Journal of Banking and Finance 149 (2023) 106779
composition driver. Column (3) of Table 2 shows the results of run-
ning the previous regression, where we only use the sample of en-
trepreneurs starting a firm, and the dependent variable is 1 if the
entrepreneur is starting a necessity firm. Thus, we can interpret
the coefficients as the effects on the share of necessity firms out
of all started firms. The share of necessity firms increases by 35
pp during COVID-19, and this increase is homogeneous with re-
spect to income, as well as with respect to age and education as
can be seen in column (3) of Table C.1. This surge in necessity en-
trepreneurs confirms the descriptive evidence presented in Fig. 4.
Importantly, it is not statistically significantly different between
the two income groups, indicating that the surge in necessity en-
trepreneurship during COVID is not the reason why we see a large
differential performance of high- versus low- and medium-income
households. It should then be that high-income households were
better able to take advantage of the new opportunities that arose
during the crisis, because of their larger availability of finance and
lower likelihood of being financially constrained. We explore this
“lack of finance” hypothesis below in Section 4.3 and the rise of
new opportunities in Section 4.4, while in Section 4.5 we show ro-
bustness checks that exclude alternative explanations for the re-
sults.
4.3. Entrepreneurial financing during COVID-19
Starting with the 2017 survey, the GEM asks new entrepreneurs
to report the funding sources for their new businesses. In particu-
lar, they state the percentage of overall funds stemming from each
of the following sources: personal savings, family savings, friends,
subsidies, investors, banks, or other sources. Figure C.2 in the Ap-
pendix shows the average percentage of funds coming from each of
these sources for each year, separately for low-income and high-
income respondents. Notably, in each year and for each income
group, the majority of funds (approximately 60%) stems from per-
sonal savings. The second most important source are banks, with
approximately 20%, followed by family savings with 10%. This re-
lationsip is consistent with the pecking order of finance, according
to which the cheapest source of finance is used first (own savings);
then, the potential entrepreneurs resort to personal relations (fam-
ily and friends) and finally to institutional lenders (banks). Regard-
ing the funding composition during the pandemic in 2020, we see,
especially for the low and medium-income group, a rise in per-
sonal savings and a drop in funding from banks compared to 2019.
This pattern is similar but less pronounced for high-income house-
holds.
Naturally, we can only observe the funding sources of GEM re-
spondents that decided to become entrepreneurs. Thus, any analy-
sis focusing only on the sample of entrepreneurs is likely to suffer
from selection bias. For example, we do not observe entrepreneurs
that refrained from creating a firm because their personal savings
were insufficient or because their credit application was rejected.
This issue could also be important when quantifying the effect
of the pandemic on funding sources because the motives of en-
trepreneurs and the types of their projects differ in 2020, as we
have shown above. To correct for this bias, we estimate a Heckman
selection model, where we estimate as the selection equation the
specification shown in Column 1 of Table 2 but without the terms
involving the GR dummy because we are constrained to using only
the years 2017–2020. The main equation then includes only our
variables of interest: a dummy indicating the year of the COVID-
19 pandemic, a dummy for high income, and an interaction be-
tween these two. As dependent variables, we consider the share of
funding coming from banks, the share coming from private savings,
and the share coming from all residual categories. In other words,
we examine whether, conditional on starting a firm, entrepreneurs
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table 3
Funding sources of entrepreneurs during COVID-19.

(1) (2) (3) (4) (5) (6)

Bank Bank Own Own Other Other

COVID-19 -2.925 -4.658 8.459∗ ∗ 12.509∗ ∗ ∗ -5.462∗ -7.284∗ ∗

(2.9975) (3.3226) (3.4576) (3.5908) (2.8740) (3.4457)
High Income -1.254 5.101 -4.430
(3.8444) (3.8799) (3.5451)
COVID-19 x High Income 4.907 -12.339∗ ∗ 6.484∗
(4.9810) (6.2381) (3.8647)
Controls Yes Yes Yes Yes Yes Yes
Observations 92,718 92,718 92,718 92,718 92,718 92,718
R-squared

Notes: The dependent variable is the percentage of funds coming from the source indicated in the col-
umn headers among all sources of financing of the businesses of new entrepreneurs in the GEM. Due
to limited data availability, the sample is restricted to the years 2017–2020. “Own” denotes the category
“Private savings”. “Other” includes the categories family savings, friends, subsidies, investors and crowd-
funding. COV ID-19 is a dummy that takes the value 1 in 2020, and 0 otherwise. The coefficients are the
second-stage results of a Heckman selection model, where the selection equation has a dummy variable
indicating a new entrepreneur as dependent variable and the following explanatory variables; sex, age
and age squared, education, income, individual perceptions of skills to start a new firm, perception of
fear of failure, expected opportunities within 6 months and region fixed effects. Standard errors are clus-
tered at the region-year level.

with different income levels select different financing sources and
how such selection changed during COVID-19.
Table 3 presents the results. We find that the pandemic de-
creased the share of funding coming from banks, because the
coefficient of the COV ID-19 dummy is negative in the first two
columns, although it is not statistically significant. When we con-
sider the share of personal savings (Own) as the outcome vari-
able, we find a significantly positive effect (Column 3). Allowing
the effect to differ between low-income and high-income respon-
dents (Column 4) reveals that it is only the former who rely more
on personal savings to fund their startups during the pandemic.
Accordingly, as can be seen in the last two columns, low-income
entrepreneurs instead rely less on funding classified in the resid-
ual category. These findings suggest greater difficulties obtaining
financing from sources other than personal savings during the pan-
demic, especially for those with low income, who might have a
particularly high need for such alternatives. Thus, this piece of
evidence suggests that financial constraints could have played a
prominent role in explaining the strong drop in the startup rate
among those at the lower end of the income distribution.
Given the pecking order explained above, a possible alternative
interpretation of this finding is that for some reason there were
fewer opportunities for low-income households, which were also
of smaller size, than for high-income households. Because oppor-
tunities were smaller, mostly internal finance was used. However,
this “lack of opportunities” interpretation would necessarily imply
that during COVID-19, the average size of startups should have de-
clined more for low-income than for high-income households. We
explore this angle in Table 4, where we show the results of es-
timating a similar Heckman selection model but using as the de-
pendent variable of the main equation the amount of funding re-
quired for the startup (in logs) and adding the share of each type
of funding among the regressors. This table restricts the sample to
startups classified as non-necessity, but the results are robust to
using all startups (Table C.4 in the Appendix) and non-digital star-
tups only (Table C.5 in the Appendix). Column 1 shows the results
for entrepreneurs of all income categories, where we see that all
startups born during COVID-19 are smaller than those created in
other years, regardless of their income category. Hence, we do not
find that the average size of startups declined more for low- than
for high-income households. Startups financed with own funding
are in general smaller, and those financed with bank funds larger,
than the omitted category (other funds). If we split the sample
into low income (LI in Column 2) and high income (HI in Column
3), we observe that the qualitative results are the same for both
income groups. Therefore, a plausible interpretation is that low-
income households had the same opportunities as high-income
households, but because of their greater difficulty accessing ex-
ternal finance, many could not seize them (more difficulty access-
ing banks and perhaps also more difficulty accessing family and
friends because these sources engaged more in precautionary sav-
ing). On the other hand, those with larger buffers of savings might
have been better able to exploit new business opportunities, which
explains the surge in own financing described above.
Although we do not have direct information in the GEM sur-
veys on the financial frictions faced by the households, information
from external surveys support the view of tightening of financial
frictions for households and small firms during COVID. Based on
data from the ECB’s Bank Lending Survey, Panel A of Fig. C.3 shows
that credit conditions worsened constantly during 2020, with the
largest tightening happening during the third quarter of 2020, with
a level of tightening not seen since the 2012 sovereign debt cri-
sis. The tightening of financial conditions, paired with the increase
in liquidity needs due to the COVID-19 shock, translates into a
higher demand for credit, especially for SMEs. Using the ECB’s
Survey on the Access to Finance of Enterprises (SAFE), Panel B
of Fig. C.3 shows an increase in the financing gap, which is the
difference between the change in demand for external financing
and the change in its availability for surveyed SMEs, especially for
Spain.
Given that financial frictions seem an important factor in ex-
plaining the lower entry into entrepreneurship of low- and middle-
income households relative to high-income ones, it is interesting
to note that, as mentioned in Section 4.2, during the financial cri-
sis, which was also a period of pervasive financial frictions, firm
creation actually fell more among high-income households than
among other households. Unfortunately, the GEM surveys did not
ask questions on the funding sources before 2017, so we could not
include the Great Recession period in Table 3. Nonetheless, we
think two factors are important to explain this difference. First,
as we show in detail in the next section, the COVID-19 period
presented new entrepreneurial opportunities, which were likely
absent during the Great Recession. One of the main findings of
this paper is that the higher entrepreneurial entry rates of high-
income households was in part driven by their ability to better
exploit these opportunities. Second, one possible reason for this

11
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table 4
Amount of funding of entrepreneurs during COVID-19, non-necessity.

(1) (2) (3)

All LI HI

COVID-19 -0.720∗ ∗ -0.778∗ ∗ ∗ -0.656

(0.2840) (0.2778) (0.4176)
High Income 0.386
(0.3295)
COVID-19 x High Income 0.003
(0.5416)
Share of own funding -1.028∗ ∗ ∗ -1.022∗ ∗ ∗ -0.845∗ ∗ ∗
(0.3169) (0.3148) (0.2264)
Share of own funding x High Income 0.177
(0.4174)
Share of bank funding 0.881∗ 0.876∗ 0.667∗ ∗ ∗
(0.4958) (0.5030) (0.2507)
Share of bank funding x High Income -0.237
(0.5028)
Controls Yes Yes Yes
Observations 93,662 75,506 18,156
R-squared

Notes: The dependent variable is the (log) amount of funding required for the startup. Due to lim-
ited data availability, the sample is restricted to the years 2017–2020. “Own” denotes the category
“Private savings”. The coefficients are the second-stage results of a Heckman selection model, where
the selection equation has a dummy variable indicating a new entrepreneur as dependent variable
and the following explanatory variables; sex, age and age squared, education, income, individual
perceptions of skills to start a new firm, perception of fear of failure, expected opportunities within
6 months and region fixed effects. Standard errors are clustered at the region-year level. Regression
using only startups classified as non-necessity (see definition in Section 4.2).

divergence is that the Great Recession in Spain was characterized
by the burst of a huge housing bubble. High-income households
are more likely high-wealth households, and these own more (and
more valuable) real estate (see Banco de España, 2019 for a de-
tailed breakdown of real estate ownership and value by wealth
percentile). During the Great Financial crisis, real estate values
dropped dramatically, hence arguably affecting more high-income
households. A large empirical literature shows the importance of
housing as collateral to finance new entrepreneurial ventures, and
therefore this might help to explain the larger drop among high-
income entrepreneurs.
4.4. New entrepreneurial opportunities due to COVID-19
In the previous section, we presented evidence consistent with
the view that high-income entrepreneurial households performed
well during the pandemic because they were better able to exploit
investment opportunities. The GEM surveys allow us to provide
additional evidence on this hypothesis because they ask new en-
trepreneurs to describe in their own words the kind of business
they are intending to create. To make use of this information, we
searched for a range of key words in the respondents’ descriptions
that suggest that their business is of a digital nature.25 We then
classify the startups as “digital” if at least one of these key words
is used.
In Table 5, we show the regression results using the specifica-
tion in Column (1) of Table 2 but replacing our previous depen-
dent variable that indicated a start of any kind of business with a
dummy indicating the start of a digital business. Note that the de-
scription of the nature of the business is only asked in the survey
since 2011; thus, we can only use the 2011–2020 sample and are
forced to drop the terms involving the GR dummy.
We find that the probability of starting a digital firm was un-
affected by the pandemic for low-income households (Column 2),
whereas the probability of starting a non-digital firm (Column 4)
25
For example, we searched for (variants of) words such as online, digital, internet,
web, informatico, virtual, e-commerce.
declines significantly. On the other hand, high-income respondents
are 0.5 percentage points significantly more likely to start a digital
firm during the pandemic than before. Note that the average prob-
ability of starting a digital firm is only 0.7% in the period 2011–
2019 for individuals with high income. Thus, the coefficient of the
interaction term in Column 2 of Table 5 implies a 70% increase in
digital startups for high-income households during the COVID-19
crisis, relative to the 2011–2019 period. This result clearly indicates
that these households were much better at exploiting new digital
business opportunities during COVID-19 than low- and medium-
income households. In contrast, the corresponding probability of
starting a non-digital firm is 5.6%, and therefore the coefficient of
the interaction term in Column 4 indicates a much smaller (and
insignificant) relative effect.
In Table 6, we run regressions analogous to those in Table 3 but
with the aim of investigating heterogeneity in funding sources de-
pending on whether a startup is digital. As digital businesses rely
more on intangible capital, they might find it more difficult to
obtain external funding from financial institutions, and thus we
expect them to rely even more on the personal savings of their
founders. As in the previous section, we run a Heckman selec-
tion model but include in the main equation the following three
variables of interest: a dummy indicating whether the respondent
started a digital firm, a dummy indicating the year of the COVID-
19 pandemic, and an interaction between these two. As depen-
dent variables, we again consider the share of funding coming from
banks, the share coming from private savings, and the share com-
ing from all residual categories. To still be able to conduct a sep-
arate analysis for low- and high-income households and simulta-
neously avoid having a triple interaction, which would complicate
the interpretation of the coefficients, we run the regression for the
full sample and then separately for the low-income (LI) and high-
income (HI) samples.
The estimates in Columns (1)–(3) reveal that starting a digi-
tal firm reduces the share of funds coming from banks regard-
less of the household’s income. However, in Columns (4)–(6), we
can see that the percentage of funds coming from personal sav-
ings is as much as 16 points larger when the business is digital.
The fact that the COV ID-19 × Digital interaction is small and in-

12
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table 5
Probability to start a ‘digital’ firm during COVID-19.

(1) (2) (3) (4)

Start Digital Start Digital Start No Digital Start No Digital

COVID-19 0.0008 -0.0003 -0.0117∗ ∗ ∗ -0.0127∗ ∗ ∗

(0.0008) (0.0007) (0.0018) (0.0015)
COVID-19 x High Income 0.0052∗ ∗ 0.0050
(0.0025) (0.0055)
Controls Yes Yes Yes Yes
Observations 224,691 224,691 228,170 228,170
R-squared 0.009 0.009 0.033 0.033

Notes: Outcomes of estimating OLS regression. The dependent variable takes the value 1 if the individual is starting a firm, 0 otherwise. Column (1) shows the results
for starting any firm, Column (2) the results for starting a low growth firms, and column (3) the results for starting a high growth firms conditional on starting a firm.
COV ID-19 is a dummy that takes the value 1 in 2020, and 0 otherwise. GR is a dummy for the Great Recession, which takes a value of 1 if the year is 2009 or 2010,
0 otherwise. Controls include sex, age and age squared, education, income, individual perceptions of skills to start a new firm, perception of fear of failure, expected
opportunities within 6 months and region fixed effects. Standard errors are clustered at the region-year level.

Table 6
Funding sources of entrepreneurs during COVID-19.

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Bank Bank, LI Bank, HI Own Own, LI Own, HI Other Other, LI Other, HI

COVID-19 -2.920 -3.406 -3.153 9.743∗ ∗ ∗ 12.122∗ ∗ 5.352 -7.134∗ ∗ -8.581∗ -3.386
(3.2622) (3.8166) (5.5455) (3.7406) (4.8051) (5.7467) (3.3790) (4.5025) (3.5551)
Digital -12.708∗ ∗ ∗ -14.013∗ ∗ -10.940∗ ∗ ∗ 16.628∗ ∗ ∗ 11.373 20.968∗ ∗ ∗ -4.609 0.611 -9.150∗
(4.2630) (5.6635) (3.4766) (5.3184) (7.4226) (4.5421) (4.7763) (5.7270) (5.4915)
COVID-19 x Digital 1.333 2.430 0.823 -1.444 16.650∗ ∗ -20.440∗ ∗ ∗ 2.409 -13.498∗ ∗ 18.566∗ ∗ ∗
(5.5361) (8.3009) (5.2675) (7.0052) (8.4712) (7.4570) (5.7633) (6.7578) (7.0890)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 92,654 74,781 17,873 92,654 74,781 17,873 92,654 74,781 17,873
R-squared

Notes: The dependent variable is the percentage of funds coming from the source indicated in the column headers among all sources of financing
of the businesses of new entrepreneurs in the GEM. Due to limited data availability, the sample is restricted to the years 2017–2020. “Own”
denotes the category “Private savings”. “Other” includes the categories family savings, friends, subsidies, investors and crowdfunding. “LI” indicates
that the sample is restricted to individuals with low income. “HI” indicates that the sample is restricted to individuals with high income. Digital
is a dummy that indicates starting a digital business. COV ID-19 is a dummy that takes the value 1 in 2020, and 0 otherwise. The coefficients are
the second-stage results of a Heckman selection model, where the selection equation has a dummy variable indicating a new entrepreneur as
dependent variable and the following explanatory variables; sex, age and age squared, education, income, individual perceptions of skills to start
a new firm, perception of fear of failure, expected opportunities within 6 months and region fixed effects. Standard errors are clustered at the
region-year level.

significant in Column (4) suggests that the greater reliance on per-
sonal savings for digital startups was similar before and during the
pandemic. However, this masks a notable pattern that we uncover
by considering income groups separately in Columns (5) and (6).
We find that before the pandemic, the own funding share of dig-
ital startups is 21 pp larger for high-income and 11 pp larger for
low-income households. In contrast, as indicated by the interac-
tion term, during the pandemic, low-income households relied even
more on own savings when creating a digital startup, whereas
there is no significant difference between digital and other star-
tups for high-income households. Accordingly, we see (roughly)
coefficients with the opposite signs when considering the resid-
ual category of “other” funding sources in Columns (7)-(9). Hence,
low-income households starting new firms of a digital nature dur-
ing the pandemic were especially dependent on personal savings
as their main funding source. In quantitative terms, on average, a
low-income entrepreneur starting a digital business in 2020 had a
40 pp larger share of personal savings among all sources of fund-
ing than a low-income entrepreneur starting a non-digital business
before 2020. Thus, these results acknowledge once again the diffi-
culty for households with low income levels in obtaining alterna-
tive financial resources to found digital firms during COVID-19.
4.5. Robustness checks
In this section we verify the robustness of our results to possi-
ble alternative explanations. First, we verify that the results do not
depend on sector heterogeneity. Second, we verify that low- and
middle-income households did not start fewer firms because they
are usually involved in activities that by their nature are more di-
rectly affected by the COVID shock.
4.5.1. Heterogeneity of the impact of COVID-19 depending on the
sector
An important feature of the COVID-19 crisis is that it affected
certain sectors more than others. Indeed, hotels and restaurants
remained closed or could only open under restrictions for a long
time during the pandemic. Moreover, the activities of transport
businesses have been strongly reduced. Hence, our results could
be in part driven by the fact that low- and medium-income house-
holds were more involved in these affected sectors relative to high-
income households.
To investigate this possibility, we separate firms into affected
sectors (which includes hotels, restaurants and transports) and the
remaining sectors that are not directly affected. Table 7 shows the
outcome of estimating Eq. (1) adding heterogeneity by income,
where the dependent variable is the likelihood to start a firm in a
sector that is not affected (Column 1) or affected (Column 2). The
likelihood to start a firm in not directly affected sectors is 1.5pp
lower for low-income households, while it increases very slightly
for high-income households (1.7pp-1.5pp=0.2pp). In relative terms,
the negative effect on low-income households considering only un-
affected sectors is almost identical to the one we estimated consid-
ering all sectors. For those with low income, the average probabil-
ity to start a firm in any sector across the sample period is 3.8%.
Thus, the coefficient in column 1 of Table 2, −.017, implies a 45%
decrease. The average probability to start a firm in unaffected sec-
tors for low-income individuals is 3.5%, so that the first coefficient

13
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table 7
Probability to start a firm during COVID-19: High vs Low income, Affected vs not affected.

(1) (2) (3) (4)

Start Not affected Start Affected High Growth Share Not affected High Growth Share Affected

COVID-19 -0.0155∗ ∗ ∗ -0.0016∗ ∗ ∗ -0.1021∗ ∗ ∗ -0.1863∗

(0.0013) (0.0005) (0.0298) (0.0959)
COVID-19 x High Income 0.0172∗ ∗ ∗ 0.0014∗ 0.1173∗ ∗ ∗ 0.3109
(0.0058) (0.0008) (0.0418) (0.2761)
GR -0.0119∗ ∗ ∗ -0.0022∗ ∗ ∗ -0.0648∗ ∗ ∗ 0.0037
(0.0019) (0.0004) (0.0234) (0.1258)
GR x High Income -0.0141∗ ∗ ∗ 0.0006 -0.0033 -0.1218
(0.0040) (0.0008) (0.0377) (0.1700)
Controls Yes Yes Yes Yes
Observations 389,426 389,426 8108 1126
R-squared 0.039 0.004 0.015 0.037

Notes: Outcomes of estimating OLS regression. The dependent variable takes the value 1 if the individual is starting a firm, 0 otherwise.
Affected sectors (second and fourth column) include hotels, restaurants and transport. Column (1) and (2) show the results for starting
any firm and Column (3) and (4) the results for starting a high-growth firm conditional on starting a firm (in the indicated group of
sectors). COV ID-19 is a dummy that takes the value 1 in 2020, and 0 otherwise. GR is a dummy for the Great Recession, which takes
a value of 1 if the year is 2009 or 2010, 0 otherwise. High income is a dummy that takes the value 1 if the individual is in the upper
33th income percentile. Additional ontrols include sex, age and age squared, a dummy for post-secondary education, income, individual
perceptions of skills to start a new firm, perception of fear of failure, expected opportunities within 6 months and region fixed effects.
Standard errors are clustered at the region-year level.

in column 1 of Table 7 implies a 44% decrease in the startup prob-
ability for this income group.
On the other hand, in affected sectors, the decrease in the like-
lihood to start a firm is 0.16pp for individuals with low household
income. In relative terms, this implies a decrease of 53%, since
for this income group the probability of starting a firm in an af-
fected sector is only 0.3%. Thus, as expected, affected sectors ex-
perienced a somewhat larger relative decline in startup creation in
2020. However, as our previous results remain almost unchanged
when considering only unaffected sectors, we can conclude that
they are not driven by a sector-composition explanation.
Columns (3) ad (4) show that there is also a change in the
composition of entrants both in affected and unaffected sectors,
although it is quantitatively larger in the former. Among new
entrepreneurs in unaffected sectors, low-income households are
10.2pp less likely to start a high-growth firm, while high-income
households are 1.5pp more likely to do so (-10.2pp+11.7pp). This
difference is exacerbated in affected sectors, where low-income
households are 18.6pp less likely to start a high-growth firm, and
high-income households are 12.5pp more likely to start a high-
growth firm (-18.6pp+31.1pp=12.5pp), although these effects are
imprecisely estimated due to the low number of observations.
4.5.2. Heterogeneous entrepreneurial choices during COVID-19
depending on the shock
In the previous section, we showed that our results are not
driven by a sector effect. Nevertheless, it could be that, even within
the same sectors, low-income households are involved in activities
that by their nature are more directly affected by the COVID-19
shock. The richness of the GEM survey also allows us to verify this
possibility. As shown in the bottom-right panel of Fig. 5, the GEM
includes a question asking respondents to state the extent to which
their household’s income was affected by the pandemic. Approxi-
mately 40% of low-income and 30% of high-income households re-
port that their income decreased at least somewhat. In this sec-
tion, we therefore investigate whether there is a relationship be-
tween the propensity to start a new business and the experience
of a negative income shock due to the pandemic. Furthermore, we
show how this relationship depends on the level of household in-
come.
To do so, we run the same specification shown in the first two
columns of Table 2 but allow both the COV ID-19 dummy and its in-
teraction with High Income to differ between the group of respon-
dents that suffered a negative income shock (Income Decreased)
and the group that did not (Income Not Decreased). Table 8 shows
the results of this regression. We find that among those with low
income (first two rows), those who were not hit by a negative in-
come shock were even less likely to create a startup than those
who suffered an income loss. On the other hand, as seen in the
second column, the share of high-growth startups has fallen more
for those that did experience a decline in income. Hence, these re-
sults suggest that entrepreneurship might have acted as a substi-
tute for regular employment and therefore cushioned the decline
in business creation among low-income households with a nega-
tive income shock. However, as these households are more likely
to engage in business creation out of necessity, their businesses are
less likely to have high growth potential. This interpretation is con-
sistent with the previously shown evidence that job scarcity has
become an important motive for becoming an entrepreneur during
the pandemic.
With respect to high-income households (third and fourth
rows), we see the opposite picture in terms of the relationship
between starting a business and experiencing an income shock:
those who saw their income decrease during the pandemic are less
likely to become entrepreneurs than those that did not. Hence, it
seems that, contrary to low-income households, the households
that could keep their income stable during the pandemic were
more likely to engage in entrepreneurship. Among the individu-
als that were not hit by an income shock, those with high income
were 2.9 pp more likely to become entrepreneurs during the pan-
demic. In contrast, among these with a negative shock, there was
no difference in the probability of becoming an entrepreneur.26
A possible explanation for this finding is that high-income en-
trepreneurs were able to recognize the pandemic as an opportu-
nity rather than an obstacle for business creation. This is again in
line with the prima facie evidence shown in Fig. 4. While almost
no respondents with low income answer that the expectations for
business growth are much higher than one year ago, approximately
10% of those with high income do. Moreover, an even closer look at
the data reveals that, among high-income households, those with a
26
Note that the survey question does not further specify whether a decrease in
income is due to a job loss, switch to a lower paid one, or a fall in income in the
same job. However, the data include a variable indicating the employment status
before the corona pandemic. Based on this information, we find that 5% of the re-
spondents lost their job since the start of the pandemic. As 40% claim that their
income decreased, we can conclude that for approximately 12.5% of them the cause
is a job loss.

14
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table 8
Probability to start a firm during COVID-19: High vs Low income, Income decreased vs In-
come not decreased.

(1) (2)
Start High Growth Share

COVID-19 x Income Decreased -0.012∗ ∗ ∗ -0.134∗ ∗ ∗

(0.0019) (0.0372)
COVID-19 x Income Not Decreased -0.021∗ ∗ ∗ -0.068∗
(0.0015) (0.0395)
COVID-19 x High Income x Income Decreased 0.000 0.153∗ ∗ ∗
(0.0070) (0.0574)
COVID-19 x High Income x Income Not Decreased 0.029∗ ∗ ∗ 0.096∗
(0.0083) (0.0500)
Controls Yes Yes
Observations 389,426 9234
R-squared 0.043 0.013

Notes: Outcomes of estimating OLS regression. The dependent variable takes the value 1
if the individual is starting a firm, 0 otherwise. Column (1) shows the results for start-
ing any firm and Column (2) the results for starting a high growth firms conditional on
starting a firm. COV ID-19 is a dummy that takes the value 1 in 2020, and 0 otherwise. In-
come decreased is a dummy that takes the value 1 if income of the household decreased
during COVID-19, 0 otherwise. Income not decreased is the complement set of Income de-
creased. Controls include sex, age and age squared, education, income, individual perceptions
of skills to start a new firm, perception of fear of failure, expected opportunities within 6
months and region fixed effects. Standard errors are clustered at the region-year level.

negative income shock are much less optimistic: only 2.6% of them
report that their expectations for business growth are much higher
than one year ago.
4.6. Effects on long-run employment growth
In Appendix B, we estimate the medium- and long-term job
losses caused by the drop in entrepreneurship among low- and
middle-income households. We do so by matching, at the sector
level, the GEM survey data from 2005 to 2020 with Spanish firm-
level data from Central de Balances Integrada (CBI) from the Banco
de España. First, using past data, we document the employment
growth patterns of entering cohorts and how changes in the share
of high-growth firms impacts employment growth. Second, with
the previous findings from the GEM regarding the entry choice
and its composition (low- vs high-growth startups) during 2020
at hand, we predict the evolution of employment of the entering
cohort in the coming years. We find that the employment of the
generation of firms created during the pandemic is expected to be
2.4% smaller after 10 years, mostly because of the drop in star-
tups with high growth potential from low-income entrepreneurs. If
all households behaved as high-income households, we would not
see a reduction in entry, and there would be employment gains
in the long run. These results highlight the importance of income
inequality for firm entry and long-run employment growth in the
aftermath of the COVID-19 shock.
5. Conclusion
In this paper, we study entry into entrepreneurship during
the 2020 COVID-19 recession using a new extensive survey of
more than 24,0 0 0 Spanish households, conducted between July
and November 2020. We find that while the overall decline in the
startup rate in 2020 was large and overall quantitatively similar to
that during the Great Recession, the heterogeneity in the impact
of the crisis depending on household income was starkly differ-
ent. During 2020, the drop in firm entry was entirely concentrated
among households with low or medium income. In fact, we find
no reduction in entry among those with high income (defined as
the top tercile income group) and even a slight increase in the en-
try of startups with high growth potential. Conversely, during the
Great Recession, high-income households suffered a significantly
stronger decline in entry than other households. We show that
these findings are not directly explained by social distancing, since
they are mostly driven by the sectors not directly affected by lock-
down measures. Furthermore, the difference between entry into
entrepreneurship between high- and medium/low-income house-
holds was particularly large among those that did not suffer a neg-
ative income shock during the pandemic. We instead find evidence
indicating that high-income households performed relatively better
during the COVID-19 recession because they were better at exploit-
ing new business opportunities, thanks to their larger wealth and
better access to external finance. This finding is consistent with ev-
idence of credit tightening and highlights the importance of con-
straints on the access to finance for low-income households as one
of the main reasons for their reduced entrepreneurial activity dur-
ing the pandemic compared to high-income households. Overall,
the main implication of this paper is that while policies directed
at supporting current jobs during a pandemic are important, to en-
sure a durable recovery in the future, they should be accompanied
by measures directed at reducing the cost of credit for new poten-
tial entrepreneurs, especially those with low income.
Data availability
Data will be made available on request.
Appendix A. Data and variable definitions
A1. Business types identified from GEM questions
To identify a startup with high growth potential, we refer to the
following two questions:
1. “Currently, how many people, not counting the owners but
including exclusive subcontractors, are working for this busi-
ness?”
2. “Not counting the owners but including all exclusive subcon-
tractors, how many people will be working for this business
when it is five years old?”
We compute the size of the established firms by sector (at the
2-digit level) and country (averaged across all years) by using the
answer to the first question given by respondents who are owners

15
C. Albert, A. Caggese, B. González et al.
of firms that are 5 or more years old.27 We then classify a startup
as having high growth potential if the answer to the second ques-
tion, i.e., the expected size in five years, exceeds the average size of
the established firms at the sector-country level. Ideally, we would
use only firms that are exactly five years old as the comparison
benchmark. However, this process would result in very few obser-
vations in many country-sectors; therefore, we choose to consider
all firms that are at least five years old.28
A1.1. Validity of the high-growth type measure during COVID-19
One issue regarding the change in the composition of entrants
in low- vs. high-growth firms is that our classification depends on
the perception of the entrepreneur.29 Although in Appendix B.1, we
validate this measure using historical data matched with firm-level
data, it might be the case that due to the very unique features of
this crisis, including the large surge in uncertainty, our measured
decrease in the high-growth share among new firms is just a re-
flection of a worsening of the perception of future performance
due to uncertainty. We believe that this is not the case because
the increase in the perception of uncertainty by firms is general-
ized and relatively homogeneous within sector and region once the
size of the shock is accounted for. If the compositional change were
only driven by changes in perceptions due to the shock, this would
affect in a similar way low- and high-income entrepreneurs, so we
would expect a homogeneous drop in high-growth firms, while we
find that the compositional change was heterogeneous depending
on the ex ante level of income. Second, if uncertainty were play-
ing a large role, we would also expect all entrepreneurs in affected
sectors to be more pessimistic and hence see a more marked de-
crease of high-growth firms in these sectors. However, we show
that high-income households are actually more likely to start high-
growth firms in affected sectors than in non-affected sectors dur-
ing COVID-19. We believe that this evidence suggests that the com-
positional changes of entrants are not solely driven by the large
increase in uncertainty surrounding the pandemic.
A2. Variable definitions from GEM questions
Apart from identifying startups and high-growth firms as ex-
plained above, we construct the following variables to use as re-
gressors and controls:
• Gender. Variable GENDER is a dummy taking value 1 if male, 0
if female.
• Age. Variable AGE gives the age of the respondent in years.
• Educational level. Variable GEMEDUC gives 5 categories for edu-
cation: pre-primary education, primary education or first stage
of basic education, lower secondary or second stage of basic
education, (upper) secondary education, post-secondary non-
tertiary education, first stage of tertiary education, and second
stage of tertiary education. We create a dummy that takes value
1 if the individual has post-secondary non-tertiary education,
first stage of tertiary education or second stage of tertiary edu-
cation, 0 otherwise.
• Income category. Variable GEMHHINC gives the income tercile
that the respondent belongs to. We create a dummy that takes
value 1 if the respondent is in the highest 33% of the income
distribution, 0 otherwise.
• Perception of skills to start a new firm. In the variable SUSKILL,
GEM asks respondents the following yes/no question: ‘Do you
27
As there is no information on the date of firm creation in the GEM data, we use
the first year a firm paid wages or profits to the owners as a proxy.
28
We confirm that the main results are not sensitive to using different ranges of
the firm age, e.g., five to ten years, to compute the average size of established firms.
29
We classify startups as low/high growth by using the expected number of em-
ployees of the firm five years into the future reported by new entrepreneurs.
16
Journal of Banking and Finance 149 (2023) 106779
have the knowledge, skill and experience required to start a new
business?’. We create a dummy from the response to this ques-
tion.
• Perception of fear of failure. In the variable FEARFAIL, GEM asks
respondents the following yes/no question: ‘Would fear of failure
prevent you from starting a business?’. We create a dummy from
the response to this question.
• Expected opportunities within 6 months. In the variable OPPORT,
GEM asks respondents the following yes/no question: ‘In the
next six months, will there be good opportunities for starting a
business in the area where you live?’. We create a dummy from
the response to this question.
• Region. Autonomous community where the household lives. The
Spanish territory is divided into 19 autonomous communities
and cities which are the second-level territorial and adminis-
trative divisions NUTS 2 under EUROSTAT classifications.
• Sector. Main sector of activity of the business. Sectors are de-
fined at the 2-digit level.
Appendix B. COVID-19 and expected employment growth
In this Appendix we use the fall in firm entry and the changes
in its composition that we documented in the main text to pre-
dict future firm size and employment growth. For this purpose, we
complement the GEM with firm-level balance sheet data from Cen-
tral de Balances Integrada (CBI), a panel of Spanish firm-level data
spanning from 1996 to 2018, which virtually covers the entire pop-
ulation of Spanish incorporated firms.
Firm-level balance sheet data: Central de Balances Integrada
We make use of firm balance sheet data to predict the long-
run employment implications of the changes in entrepreneurial
choices we find in the GEM. Firms’ balance sheet data come from
Central de Balances Integrada, the business registry data available
at the Bank of Spain, which contains the quasi universe of in-
corporated Spanish firms. These data come from the annual ac-
counts that firms deposit at the Commercial Registry, which is
collected and treated by Banco de España. In Spain, it is manda-
tory for all firms to deposit their annual accounts (balance sheet,
income statements and annual reports) in the Commercial Reg-
istry.30 We exclude firms in the primary sector and mining, the
financial and insurance sector, and public administration. We also
only retain firms that have at least one employee at some point of
their lives because our goal is to focus on firms that create em-
ployment. Furthermore, we drop firms that are part of a group
and those that have more than 100 employees and/or are pub-
licly traded in the year of their creation or the next, since these
are likely entities created through restructuring of existing firms.
We link the information on startups from GEM with this firm-
level dataset at the sector-year level.31 Employment is defined as
the average number of employees during the year, and age is com-
puted as the difference between the current year and incorporation
year.
B1. The relationship between startups and future firm growth
We use this dataset to answer two questions. First, how long-
lasting are the effects of firm entry, regardless of the type of firm
created, on the aggregate employment of the cohort? Second, does
the composition of entry (high-growth vs. low-growth firms) mat-
ter for the long-run job creation of a cohort of firms? To under-
30
For more detailed information on this dataset, see Almunia et al. (2018).
31
Sectors are defined as the 2-digit CNAE in the CBI dataset, and we convert them
into ISIC-2 sectors to match the GEM dataset.
C. Albert, A. Caggese, B. González et al.
stand the first issue, we run the following regression:
log Employment _cohortk,s,t = γ0,k + γ1,k log New_firmss,t−k
+φt,k + ψs,k + k,s,t
where Employment _cohortk,s,t is total employment of all firms of
age k belonging to industry s in period t and New_firmss,t−k is the
number of firms entering the year that cohort entered, t − k. We
perform one regression for each time horizon k ∈ [1, 10]. Thus, the
set of coefficients γ1,k indicates the deviation in employment from
the average employment of firms of age k due to fluctuations in
the number of firms that had initially entered. The estimated coef-
ficients are reported in Fig. C.5. An increase of 1% in firm entry will
increase the employment of that cohort by nearly 0.9% in the first
period. The figure shows that the employment impact of firm entry
declines with time, but it still remains large and significant: after
10 years, the impact on the cohort’s employment is still 0.63%.
Regarding the second issue, we verify whether the entry of rel-
atively more high-growth startups predicts faster ex post employ-
ment growth of the specific cohort. Since we cannot directly link
GEM data with the firm-level data from CBI, we proceed as fol-
lows: using GEM data, we compute the variable Share_growths,t ,
i.e., the share of high-growth startups in 2-digit sector s in year t
in Spain. Then, we match these industry shares with the firm-level
data from CBI. We are able to match 3,359,683 firm-year observa-
tions to the share of high-growth firms in the sector and year they
were created. Using these matched data, we run the following re-
gression:

K
log Employmenti,s,t = β0 + β1,k ageki,s,t
k=0

K
+ β2,k ageki,s,t Share_growtht−k
i,s
+ φt + ψs + s,t
k=0
where Employmenti,s,t is the employment of firm i belonging to in-
dustry s at time t; ageki,s,t is an indicator equal to 1 if the firm is
k years old at time t; and Share_growtht−ki,s,t
is the share of high-
growth firms in the year the firm was created (t − k). If high-
growth firms generate more employment than low-growth firms,
we would expect the employment of firms in sectors with a high
share of the former to be larger on average, and hence the inter-
action term β2,k would be positive. The results are presented in
Table C.6. In Column (1), we control for any aggregate shock and
sector-specific factors by controlling for time and sector fixed ef-
fects. In Column (2), we further saturate the model by including
sector-year fixed effects. We find that the interaction coefficients
are negative in the first periods and then become positive in the
medium to long term. This implies that, although during the first
years these high-growth firms remain smaller, they are eventually
able to realize their full potential and end up growing above av-
erage. In quantitative terms, the coefficients in Column (1) imply
that a sector composed of only high-growth firms would have an
average size of newborn firms 29% smaller than the newborn firms
in a sector composed only of low-growth firms. However, the high-
growth firms would grow faster and be on average 25% larger than
the low-growth firms when both types are 8 years old. This find-
ing highlights the importance of the composition effect of entry for
medium- to long-run employment growth.
B2. Predictions of the impact of the pandemic on future employment
We now use these estimates to predict the long-run implica-
tions for firm size and job growth for Spain, as shown in Fig. C.6.
This analysis focuses on the impact of the entry and composition
margins on aggregate employment of the cohort of firms entering
in the current year and on its evolution over the following years.
Journal of Banking and Finance 149 (2023) 106779
Hence, we are abstracting from possible general equilibrium effects
on prices and interest rates, as well as on employment spillover ef-
fects on firms in different cohorts and sectors.32
(2) We construct these predictions in the following way. First, we
consider the change in overall entry and change in the composition
of entry we obtain in Table 1. Then, with this predicted decrease in
firm creation, we multiply γ1,k from Eq. (2) by the aggregate em-
ployment of firms of age k from CBI (averaged across all the years
of our sample) to compute the predicted job losses of the cohort
entering in 2020 from 2021 (k = 1) to 2030 (k = 10). This is the
long-run effect of the entry channel, which is depicted in blue in
Fig. C.6. Second, we also want to include the impact of the com-
position channel on aggregate employment. To do so, with the co-
efficients of the interaction terms in Equation (3) depicted in the
first column of Table C.6, we obtain the effect of the share of high-
growth firms in a new cohort on its average firm-level employ-
ment at each age k = 1, 2, . . . , 10. Then, to compute the t + k for-
ward prediction on the change in overall cohort employment due
to a change in the composition of entry, we multiply the predicted
decrease in the share of high-growth firms by the coefficient β2,k
in Eq. (3) and the aggregate employment of firms of age k. We
then add these changes in employment due to the composition
channel to the changes in employment due to the entry channel
to obtain the overall predicted impact on the long-run aggregate
employment of the cohort, which is depicted in red in Fig. C.6. Us-
ing the same methodology but using the predicted changes in en-
try and composition of entry for high- and low-income households
in Table 2, we obtain counterfactual scenarios in a world where
all agents behave either as high-income or low-income households
(Panels B and C of Table 2).
Panel A of Fig. C.6 shows the long-run employment effect for
the full sample. Due to the fall in entry predicted by Table 1, there
(3)
would be a loss of approximately 10 0 0 jobs for the entering co-
hort in the year of entry, and this loss would be persistent and
relatively stable even after 10 years (blue line of Panel A, Fig. C.6).
If we also add the composition effect, job losses in the entering
cohort in the first year after the shock would be near zero. This
is because there is a higher share of low-growth firms entering,
and these firms are larger when very young (see Table C.6). How-
ever, as firms grow older, high-growth firms grow much faster
than low-growth firms. This creates larger employment losses in
the medium to long run, which peaks at nearly 40 0 0 jobs lost
in 2028 and 2029 in the 2020 firm cohort. To put this number
in perspective, we can compare it to the average size of a cohort
of firms, depending on age, in Spain. Firms that are one year old
employ on average approximately 10 0,0 0 0 workers. Over the life-
cycle, the employment grows to approximately 170,0 0 0 for firms
that are nine years old. Thus, assuming that the cohort of firms
that entered in 2020 would have grown at the average rate in the
absence of COVID-19, the combined entry and composition effects
of the pandemic imply 2.4% lower employment for this firm cohort
in 2029.
Panel B and Panel C of Fig. C.6 show the counterfactuals if all
the population behaved as high-income households (Panel B) or
as low-income households (Panel C). As we discussed in the pre-
vious section (see Table 2), respondents with high income actu-
ally start slightly more firms during COVID-19, so there would be
slight job gains in the short run that would persist in the long
run (see the blue line in Panel B, Fig. C.6). Nonetheless, there is a
stark change in composition for high-income entrepreneurs, since
they start more high-growth firms, which create fewer jobs in the
short run but more in the long run. Taking this composition chan-
32
These effects are potentially important, but we cannot analyze them here for
reasons of space and therefore leave them for future research.
17
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

nel into account, there would be approximately 500 jobs lost in Table C.1
Probability to start a firm during COVID-19: High vs Low income.
this entering cohort in 2021, but these job losses would turn into
gains in 2024, reaching more than 10 0 0 additional jobs in 2028. (1) (2) (3)
On the other hand, if all households had low income, entry would Start High Growth Share Necessity Share
decrease significantly, with close to 20 0 0 jobs lost in the entering COVID-19 -0.012∗ ∗ ∗ -0.129∗ ∗ ∗ 0.362∗ ∗ ∗
cohort in the first two years. Furthermore, since there is a compo- (0.0022) (0.0348) (0.0398)
sitional change toward low-growth firms, if we take into account COVID-19 x High Income 0.020∗ ∗ ∗ 0.132∗ ∗ ∗ -0.015
(0.0061) (0.0480) (0.0525)
the composition channel, we would actually see slightly more than
COVID-19 x Educated -0.007∗ ∗ -0.001 0.026
10 0 0 jobs gained in 2021, but this would rapidly turn into job (0.0026) (0.0635) (0.0544)
losses, peaking in 70 0 0 fewer jobs in 2028 (see red line of Panel B, COVID-19 x Young -0.010∗ ∗ ∗ 0.018 -0.085
Fig. C.6). (0.0027) (0.0433) (0.0633)
GR -0.013∗ ∗ ∗ -0.026 -0.072∗ ∗ ∗
In summary, these results indicate the importance of the com-
(0.0026) (0.0304) (0.0176)
position effect for long-run employment creation and show that GR x High Income -0.011∗ ∗ ∗ -0.005 0.022
the underlying household income heterogeneity is very relevant for (0.0042) (0.0349) (0.0243)
predicting the employment implications of changes in entry and its GR x Educated -0.008∗ ∗ -0.023 0.024
composition due to the COVID-19 recession. (0.0036) (0.0358) (0.0191)
GR x Young 0.006∗ ∗ -0.053 0.034
(0.0029) (0.0361) (0.0254)
Controls Yes Yes Yes
Appendix C. Additional tables and figures Observations 389,426 9234 15,839
R-squared 0.043 0.013 0.045

Notes: Outcomes of estimating OLS regression. The dependent variable takes the
value 1 if the individual is starting a firm, 0 otherwise. Column (1) shows the re-
sults for starting any firm, Column (2) the results for starting a high growth firms
conditional on starting a firm, and Column (3) the results for starting a necessity
firm conditional on starting a firm. A necessity entrepreneur is a new entrepreneur
that starts a firm because of lack of employment. COV ID-19 is a dummy that takes
the value 1 in 2020, and 0 otherwise. GR is a dummy for the Great Recession, which
takes a value of 1 if the year is 2009 or 2010, 0 otherwise. High income is a dummy
that takes the value 1 if the individual is in the upper 33th income percentile. Ed-
ucated is a dummy that takes the value 1 if the individual has post-secondary or
graduate experience, 0 otherwise. Young is a dummy that takes the value 1 if the
individual is younger than 35 years old, 0 otherwise. Additional controls include
sex, age and age squared, education, income, individual perceptions of skills to start
a new firm, perception of fear of failure, expected opportunities within 6 months
and region fixed effects. Standard errors are clustered at the region-year level.

Fig. C.1. Business sentiment according to the GEM. Notes: The figures shows the
percentage of GEM respondents reporting that they expect business opportunities
to be good during the coming six months.

Fig. C.2. Sources of startup funding. Notes: The bars indicate the average percentage of funds coming from the indicated sources based on the survey respondents of new
entrepreneurs in the GEM.

18
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Fig. C.3. Worsening of credit conditions. Notes: Panel A: Shows the frequency of surveyed banks answering that the general economic outlook considerably contributed
to a tightening of credit standards minus the frequency of answering that it considerably contributed to an easing of credit standards. Source: BLS, accessed from https:
//sdw.ecb.europa.eu/browse.do?node=9691151. Panel B: The figure shows the difference between the change in demand for and the change in the availability of external
finance for surveyed SMEs. Source: SAFE, accessed at https://sdw.ecb.europa.eu/browse.do?node=9689717.

Fig. C.4. Annual exit and entry rates in Spain. Notes: Data at yearly frequency comes from DIRCE, a database created by the Spanish Statistical Institute INE (https://www.
ine.es/dynt3/inebase/index.htm?padre=52&capsel=52). The graph shows annual exit rate and entry rates.

Fig. C.5. Effect of firm entry on future cohort employment. Source: CBI. Notes: The figure plots the coefficients γ1k for each time horizon k from regression (2) in solid blue,
with 95% CI in dashed red lines. (For interpretation of the references to colour in this figure legend, the reader is referred to the web version of this article.)

19
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Fig. C.6. Predicted long-run job losses due to the COVID-19 shock. Notes: Overall predicted loss in aggregate employment in Spain through the entry margin. The entry
margin series are computed by combining the fall in firm creation observed in GEM with the effect of the change in firm creation on future employment and aggregate
employment by firm age (cohort) given in the CBI data. The composition effect is computed by combining the predicted fall in forward aggregate employment of firms
due to a change in the high-growth share of firms for each year with the aggregate employment by firm age (cohort) given by the CBI data. The overall predicted loss in
aggregate employment is the sum of the entry margin and the composition margin. Panel A shows the results from the overall economy using the results of Table 1. Panel
B shows the results as if there were only high-income households, using results of Table 2. Panel C shows the results as if there were only low-income households, using
results of Table 2.

20
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table C.2
Probability of starting a firm during COVID-19: High vs. low income.

(1) (2) (3) (4)

Start High Growth Share Start High Growth Share

COVID-19 -0.024∗ ∗ ∗ -0.119∗ ∗ ∗ 0.000 -0.103

(0.0040) (0.0366) (0.0021) (0.0637)
COVID-19 x High Income 0.028∗ ∗ ∗ 0.156∗ ∗ ∗ 0.015∗ ∗ 0.088
(0.0093) (0.0456) (0.0067) (0.1406)
COVID-19 x Educated -0.009∗ ∗ -0.041 0.001 0.132
(0.0044) (0.0726) (0.0027) (0.0898)
COVID-19 x Young -0.017∗ ∗ ∗ 0.022 -0.006∗ 0.009
(0.0039) (0.0543) (0.0032) (0.0790)
GR -0.029∗ ∗ ∗ -0.053 -0.003∗ 0.050
(0.0048) (0.0328) (0.0016) (0.1063)
GR x High Income -0.011 -0.000 -0.007∗ ∗ ∗ 0.104
(0.0072) (0.0344) (0.0018) (0.1566)
∗∗
GR x Educated -0.006 0.006 -0.004 -0.350∗ ∗ ∗
(0.0058) (0.0353) (0.0019) (0.1111)
GR x Young 0.007 -0.062 0.003 0.163
(0.0050) (0.0394) (0.0024) (0.1542)
Controls Yes Yes Yes Yes
Observations 178,230 8195 211,196 1039
R-squared 0.027 0.013 0.004 0.050
Sample With business creation skills Without business creation skills

Notes: Outcomes of estimating OLS regression. The dependent variable takes value 1 if the individual is starting a firm, 0 otherwise. Columns
(1) and (3) show the results for starting any firm, Columns (2) and (4) present the results for starting a high-growth firm conditional on
starting a firm. COV ID-19 is a dummy that takes value 1 in 2020, 0 otherwise. GR is a dummy for the Great Recession, which takes a value of
1 if the year is 2009 or 2010, 0 otherwise. High income is a dummy that takes value 1 if the individual is in the top income tercile. Educated
is a dummy that takes value 1 if the individual has post-secondary or graduate experience, 0 otherwise. Young is a dummy that takes value 1
if the individual is younger than 35 years old, 0 otherwise. Additional controls include sex, age and age squared, education, income, individual
perceptions of skills to start a new firm, perception of fear of failure, expected opportunities within 6 months and region fixed effects. Standard
errors are clustered at the region-year level.

Table C.3
Probability of starting a firm during COVID-19: High vs. low income.

(1) (2) (3)

Start High Growth Share Necessity Share

COVID-19 x High Income 0.019∗ ∗ ∗ 0.151∗ ∗ ∗ 0.030

(0.0062) (0.0555) (0.0300)
GR x High Income -0.012∗ ∗ ∗ 0.016 0.026
(0.0042) (0.0491) (0.0277)
Controls Yes Yes Yes
Region-year FE Yes Yes Yes
Sector-year FE No Yes Yes
Observations 389,426 9225 15,835
R-squared 0.045 0.173 0.148

Notes: Outcomes of estimating OLS regression. The dependent variable takes the value
1 if the individual is starting a firm, 0 otherwise. Column (1) shows the results for
starting any firm, Column (2) the results for starting a high growth firm conditional
on starting a firm, and Column (3) the results for starting a necessity firm conditional
on starting a firm. A necessity entrepreneur is a new entrepreneur that starts a firm
because of lack of employment. COV ID-19 is a dummy that takes the value 1 in 2020,
and 0 otherwise. GR is a dummy for the Great Recession, which takes a value of 1 if
the year is 2009 or 2010, 0 otherwise. High income is a dummy that takes the value 1
if the individual is in the upper 33th income percentile. Additional controls include sex,
age and age squared, education, income, individual perceptions of skills to start a new
firm, perception of fear of failure, expected opportunities within 6 months and region
fixed effects. Standard errors are clustered at the region-year level.

21
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table C.4
Amount of funding for entrepreneurs during COVID-19.

(1) (2) (3)

All LI HI

COVID -0.609∗ ∗ ∗ -0.616∗ ∗ ∗ -0.730∗ ∗ ∗

(0.1922) (0.1867) (0.2183)
High Income 0.850∗ ∗
(0.3676)
COVID x High Income -0.190
(0.2764)
Share of own funding -0.453∗ -0.451∗ -0.789∗ ∗ ∗
(0.2719) (0.2694) (0.2094)
Share of own funding x High Income -0.339
(0.3258)
Share of bank funding 1.315∗ ∗ ∗ 1.315∗ ∗ ∗ 0.932∗ ∗ ∗
(0.5035) (0.5052) (0.3164)
Share of bank funding x High Income -0.420
(0.5436)
Controls Yes Yes Yes
Observations 94,298 76,003 18,295
R-squared

Notes: The dependent variable is the (log) amount of funding required for the startup.
Due to limited data availability, the sample is restricted to the years 2017–2020. “Own”
denotes the category “Private savings”. The coefficients are the second-stage results of a
Heckman selection model, where the selection equation has a dummy variable indicat-
ing a new entrepreneur as dependent variable and the following explanatory variables:
sex, age and age squared, education, income, individual perceptions of skills to start
a new firm, perception of fear of failure, expected opportunities within 6 months and
region fixed effects. Standard errors are clustered at the region-year level.

Table C.5
Amount of funding of entrepreneurs during COVID-19, non-digital.

(1) (2) (3)

All LI HI

COVID -0.566∗ ∗ ∗ -0.571∗ ∗ ∗ -0.876∗ ∗ ∗

(0.1868) (0.1927) (0.2604)
High Income 0.855∗
(0.4402)
COVID x High Income -0.407
(0.2529)
Share of own funding -0.343 -0.341 -0.723∗ ∗ ∗
(0.3291) (0.3241) (0.2692)
Share of own funding x High Income -0.389
(0.4091)
Share of bank funding 1.343∗ ∗ 1.343∗ ∗ 0.939∗ ∗
(0.5451) (0.5448) (0.3883)
Share of bank funding x High Income -0.447
(0.6299)
Controls Yes Yes Yes
Observations 94,006 75,837 18,169
R-squared

Notes: The dependent variable is the (log) amount of funding required for the startup.
Due to limited data availability, the sample is restricted to the years 2017–2020. “Own”
denotes the category “Private savings”. The coefficients are the second-stage results of a
Heckman selection model, where the selection equation has a dummy variable indicat-
ing a new entrepreneur as dependent variable and the following explanatory variables:
sex, age and age squared, education, income, individual perceptions of skills to start a
new firm, perception of fear of failure, expected opportunities within 6 months and re-
gion fixed effects. Standard errors are clustered at the region-year level. The regression
uses only startups classified as non-digital (see the definition in Section 4.4).

22
C. Albert, A. Caggese, B. González et al. Journal of Banking and Finance 149 (2023) 106779

Table C.6 Bahaj, S., Piton, S., Savagar, A., 2021. Business Creation during Covid-19. Working
Firms’ employment age profile depending on the share of high-growth firms. paper.
Balduzzi, P., Brancati, E., Brianti, M., Schiantarelli, F., 2020. The economic effects of
(1) (2) Covid-19 and credit constraints: evidence from Italian firms’ expectations and
log(Employment) log(Employment) plans.
Age 0 1.003∗ ∗ ∗ 0.716∗ ∗ ∗ Banco de España, 2019. Encuesta financiera de las familias 2017. métodos, resultados
y cambios desde 2014. Artículos Analíticos, Boletín Económico 4, 2019.
(0.0826) (0.0368)
Bartik, A.W., Bertrand, M., Cullen, Z.B., Glaeser, E.L., Luca, M., Stanton, C.T., 2020.
Age 1 1.508∗ ∗ ∗ 1.215∗ ∗ ∗
How Are Small Businesses Adjusting to Covid-19? Early Evidence from a Survey.
(0.0677) (0.0310) Technical Report. National Bureau of Economic Research.
Age 2 1.580∗ ∗ ∗ 1.283∗ ∗ ∗ Benedetti-Fasil, C., Sedlacek, P., Sterk, V., 2020. EU Start-Up Calculator: Impact of
(0.0677) (0.0274) COVID-19 on Aggregate Employment: Scenario Analysis for Austria, Belgium,
Age 3 1.587∗ ∗ ∗ 1.308∗ ∗ ∗ Germany, Hungary, Italy and Spain. JRC Working Papers. Joint Research Centre
(0.0706) (0.0352) (Seville site). https://ideas.repec.org/p/ipt/iptwpa/jrc121715.html
Age 4 1.568∗ ∗ ∗ 1.329∗ ∗ ∗ Boudreaux, C.J., Nikolaev, B.N., Klein, P., 2019. Socio-cognitive traits and en-
(0.0704) (0.0376) trepreneurship: the moderating role of economic institutions. J. Bus. Venturing
Age 5 1.540∗ ∗ ∗ 1.339∗ ∗ ∗ 34 (1), 178–196.
(0.0694) (0.0355) Braggion, F., Dwarkasing, M., Ongena, S., 2021. Household inequality, entrepreneurial
Age 6 1.537∗ ∗ ∗ 1.353∗ ∗ ∗ dynamism, and corporate financing. Rev. Financ. Stud. 34 (5), 2448–2507.
(0.0715) (0.0370) Brown, R., Rocha, A., Cowling, M., 2020. Financing entrepreneurship in times of cri-
sis: exploring the impact of Covid-19 on the market for entrepreneurial finance
Age 7 1.526∗ ∗ ∗ 1.362∗ ∗ ∗
in the United Kingdom. Int. Small Bus. J. 38 (5), 380–390.
(0.0714) (0.0324)
Bruton, G., Sutter, C., Lenz, A.-K., 2021. Economic inequality–is entrepreneurship the
Age 8 1.502∗ ∗ ∗ 1.357∗ ∗ ∗
cause or the solution? A review and research agenda for emerging economies.
(0.0736) (0.0320) J. Bus. Venturing 36 (3), 106095.
Age 9 1.502∗ ∗ ∗ 1.360∗ ∗ ∗ Core, F., De Marco, F., 2021. Public guarantees for small businesses in Italy during
(0.0772) (0.0364) Covid-19.
Age 10 1.531∗ ∗ ∗ 1.369∗ ∗ ∗ Corradin, S., Popov, A., 2015. House prices, home equity borrowing, and en-
(0.0808) (0.0456) trepreneurship. Rev. Financ. Stud. 28 (8), 2399–2428.
Age 0 x share -0.289∗ ∗ ∗ -0.094 Dietrich, A.M., Kuester, K., Müller, G.J., Schoenle, R., 2022. News and uncertainty
(0.0976) (0.0806) about Covid-19: survey evidence and short-run economic impact. J. Monet.
Age 1 x share -0.251∗ ∗ ∗ -0.044 Econ..
(0.0627) (0.0512) Dinlersoz, E., Dunne, T., Haltiwanger, J., Penciakova, V., 2021. Business formation: a
Age 2 x share -0.178∗ ∗ ∗ 0.027 tale of two recessions. In: AEA Papers and Proceedings, Vol. 111, pp. 253–257.
Fairlie, R., 2020. The impact of Covid-19 on small business owners: evidence form
(0.0630) (0.0394)
the first three months after widespread social-distancing restrictions. J. Econ.
Age 3 x share -0.079 0.084∗
Manage. Strategy 29 (4), 727–740. doi:10.1111/jems.12400.
(0.0619) (0.0493)
Ferrando, A., Ganoulis, I., 2020. Firms’ expectations on access to finance at the early
Age 4 x share 0.030 0.110∗ ∗ stages of the Covid-19 pandemic.
(0.0550) (0.0509) Fritsch, M., Greve, M., Wyrwich, M., 2021. The COVID-19 Pandemic and En-
Age 5 x share 0.130∗ ∗ ∗ 0.142∗ ∗ ∗ trepreneurship in Germany: First Observations and Interpretations. Jena Eco-
(0.0476) (0.0475) nomic Research Papers 2021-007. Jena. http://hdl.handle.net/10419/243078
Age 6 x share 0.159∗ ∗ ∗ 0.139∗ ∗ ∗ Gabaix, X., Lasry, J.-M., Lions, P.-L., Moll, B., 2016. The dynamics of inequality. Econo-
(0.0578) (0.0515) metrica 84 (6), 2071–2111.
Age 7 x share 0.196∗ ∗ ∗ 0.138∗ ∗ ∗ Gourinchas, P.-O., Kalemli-Özcan, Ş., Penciakova, V., Sander, N., 2020. Covid-19 and
(0.0682) (0.0480) SME Failures. Technical Report. National Bureau of Economic Research.
Age 8 x share 0.256∗ ∗ ∗ 0.161∗ ∗ ∗ Groenewegen, J., Hardeman, S., Stam, E., 2021. Does Covid-19 state aid reach the
(0.0866) (0.0522) right firms? Covid-19 state aid, turnover expectations, uncertainty and manage-
Age 9 x share 0.247∗ ∗ 0.149∗ ∗ ment practices. J. Bus. Venturing Insights 16, e00262.
Haltiwanger, J.C., 2022. Entrepreneurship during the Covid-19 pandemic: evidence
(0.0975) (0.0635)
from the business formation statistics. Entrepreneurship Innov. PolicyEconomy
Age 10 x share 0.177∗ 0.117
1 (1), 9–42.
(0.0972) (0.0725) Halvarsson, D., Korpi, M., Wennberg, K., 2018. Entrepreneurship and income inequal-
Year FE Yes No ity. J. Econ. Behav. Organ. 145, 275–293.
Sector FE Yes No Hassan, T.A., Hollander, S., van Lent, L., Tahoun, A., 2020. Firm-level exposure to
Year-sector FE No Yes epidemic diseases: Covid-19, SARS, and H1N1. Technical Report. National Bureau
Observations 1,755,792 1,755,792 of Economic Research.
R-squared 0.400 0.402 Hoshi, T., Kawaguchi, D., Ueda, K., 2022. Zombies, again? The Covid-19 business sup-
port programs in Japan. J.. Bank. Finance 106421.
Notes: Number of entrants and their employment is computed from CBI using the Lee, D., Doerr, S., Drechsel, T., 2022. Income Inequality and Job Creation. FRB of New
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longs in the year it was born. Significance levels: ∗ p<0.1, ∗ ∗ p<0.05, ∗ ∗ ∗ p<0.01. ship under Covid-19. Calif. Manage. Rev. 63 (1).
McGee, J.E., Peterson, M., Mueller, S.L., Sequeira, J.M., 2009. Entrepreneurial self–ef-
ficacy: refining the measure. Entrepreneurship Theory Pract. 33 (4), 965–988.
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